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Published: Fri, 02 Feb 2018
Propriety claims in common law principles
The concept of proprietary claims revolves around a number of key common law principles. It is important to understand these principles before attempting to apply them to the cricket club’s and Adverb plc’s circumstances. Under the common law, where a payment reaches a recipient by mistake by way of a third party, it is the responsibility of the payor to assert a proprietary claim to the money on the basis that he or she had initial legal title to it. Essentially, it is a claim for the value of the property, not for the property itself, as the common law does not generally recognise proprietary remedies as such (Trustee of the Property of FC Jones and Sons (a firm) v Jones  Ch 159, 168, CA). Additionally, the common law also provides that it is an irrelevant consideration as to whether the recipient has retained the property, as he or she is liable from the moment of receipt (Agip (Africa) Ltd v Jackson  Ch 265, 285 (Millett J)). Money, under the common law, is recognised as legal property, thus a claim can be substantiated if legal title is proven (Lipkin Gorman (a firm) v Karpnale  AC 548, 572 (Lord Goff).
Applying these principles to the facts, it is clear that the cricket club may be able to substantiate a claim against Bob for the initial £474 that was in the account at the time Bob withdrew it to take a holiday, as well as the £1,450 present at the time of taking out the loan with Adverb. However, it could also be argued by Bob that legal title to the payment had passed, given that the funds were mixed in Bob’s bank account, and it became virtually impossible to identify the cricket club’s property at law (Chase Manhattan Bank NA v Israel-British Bank (London) Ltd  Ch 105). This defence of bona fide purchaser is said to extend to intangible money (i.e. bank deposits and similar and not merely physical coins and notes). Thus, it is unclear whether Bob has actually used cricket club funds to make relevant purchases, given that there was some of Bob’s own money present initially, as well as Adverb and Soon money. Equity generally assumes that a person with a fiduciary relationship with another party in these circumstances generally makes a withdrawal of his or her own money first, rather than that of the other party, hence it would be difficult for Adverb to claim that Bob used their money in any event (Re Hallet’s Estate (1880) 13 Ch D 696; Re Tilley’s WT  Ch 117).
In regards to Adverb, it is clear that the loan payment clearly states that the money should only be used for the purchase of a car. Given the value of the transactions surrounding the loan payment, it would be reasonable to conclude that Adverb money was used to purchase shares in Y Company, and that Adverb may be entitled to recover this money. However, the question of money used from Soon is different. While it is clear that Bob should perhaps have not been taking these commissions, it is doubtful that Adverb can claim legal title to the payments, given that this was not established prior to the payments being made to Bob. It is apparent from the facts that these payments are made to Bob separately from any funds directly intended for Adverb, and thus it can be concluded that Adverb can only recover the money in relation to the loan.
The law in relation to possessory proceedings is relatively clear cut in these circumstances. From the facts of the case, it is undisputed that Odun was in breach of the mortgage provisions with Eden Finance Ltd, and hence the finance company is entitled to take possession of the property. However, Odun’s main claim may lie with the fact that Eden Finance Ltd has an obligation, as the mortgagee of the property, to seek the best possible price for the property in order to recover the maximum amount of debt possible (Cuckmere Brick Co Ltd v Mutual Finance  Ch 948). There is no obligation on a mortgagee to obtain a higher price for the property than what it is actually worth (Tse Kwong Lam v Wong Chit Sen  3 All ER 54, 59). Therefore, if the price has its basis in the fact that the property was realistically worth that price, then Eden Finance Ltd has satisfied its mortgagee obligations and no claim can be made. Additionally, no claim can be made against John for purchasing the property at this price, as the price may have been a reasonable one given the state of the property.
Given that it has been established in the facts that Tricia was not a party to the legal mortgage between Odun and Eden Finance Ltd, the only way that Tricia could succeed in a claim against the relevant parties was if it could be argued that an equitable mortgage relationship was created at some point between Tricia and the finance company. The main issue arising with this proposition is the fact that the finance company expressly stated in the original agreement that Odun was not permitted to sub-lease any part of the property while the mortgage was in place. The law in relation to this concept supports this notion (Law of Property Act 1925, s 40, in regards to agreements having to be in writing). Odun had no scope to reassign his interest in the property under the terms of the mortgage agreement, and hence Tricia has little standing to bring a claim in this circumstance. Tricia was not a party to the original agreement, and equity does not provide for a method of having an interest in the property, beyond that which was illegitimately created by the lease agreement with Odun. There is no agreement, whether legal or equitable, between Tricia and the finance company that would serve to create Tricia’s interest in the property, thus Tricia has no standing in this case against either the finance company, or against John.
This paper will seek to explore the standards of mental intent required to prove breaches of the fiduciary relationship in some circumstances, and whether these legal and/or equitable principles are unnecessary. Upon first glance, it appears that a majority of the breaches in question are essentially mental in nature, requiring some form of mental intent in order to be proven. However, the effectiveness and the necessity of these mental intent tests will be discussed throughout this chapter. This paper will now seek to explore these tests in detail as they are relevant to the particular individual breaches.
In regards to knowing receipt, it would be difficult to maintain that the mental element of this offence would be unnecessary, given that it is one that essentially requires reliance upon a person’s mental state to determine guilt. In other words, there is a requirement that the person must have had “knowledge… that the assets he received are traceable to a breach of fiduciary duty” (El Ajou v Dollar Land Holdings  2 All ER 685, 700 (Hoffman LJ)). Thus, there is reliance upon this criterion being present in order for a claim for knowing receipt to be substantiated, as this forms one of the three requirements (in addition to the actual action of receiving) of knowing receipt (El Ajou v Dollar Land Holdings  2 All ER 685, 700 (Hoffman LJ)). The presence of this key requirement serves a key purpose. It attempts to prove that one had the mental characteristics that are generally required in order to prove that one is guilty of knowing receipt. This offensive conduct generally relates to one having the presence of mind in order to commit the offence, and thus it would be unreasonable for this mental characteristic test to not exist in this circumstance. It could be argued that a claim for knowing receipt could not be substantiated, or substantiated unfairly, against a defendant should this criterion not exist, as it would only provide for a means to test his or her actions, and not whether he or she actually had the guilty knowledge required to commit the offence. Thus, in the case of knowing receipt at least, it would be difficult to conclude for the proposition that the test for mental characteristics is unnecessary.
In relation to dishonest assistance, there is also a requirement that the mental intent be considered (Royal Brunei Airways v Tan  2 AC 378 (PC)). The case law also seems to suggest that a test for dishonesty in this context is perhaps better than reliance upon simple knowledge (Royal Brunei Airways v Tan  2 AC 378, 392 (PC)), and that such a test is also ‘sufficient’. It requires an objective test of the standard of honesty that would be observed by an ‘honest person in those circumstances’ (Royal Brunei Airways v Tan  2 AC 378, 389 (PC)). This shows that dishonest assistance is attempting to steer away from the test of knowing receipt, in order to avoid any ambiguities that may arise as a result of application of similar tests for different offences. This is not to say that the mental characteristic test is unnecessary by any means, in fact it shows that there is recognition of the fact that the law needs to adapt to the differing contexts between knowing receipt and dishonest assistance in order to truly account for the differing standards of mental intent required between the two. It should also be noted at this point that the law also recognises a situation where the requirement of a detailed account of the mental intent requirements can be bypassed, if it is significantly clear that the breach of trust was dishonest in nature (Agip (Africa) Ltd v Jackson  Ch 265). Thus, it cannot be argued successfully that this mental intent requirement is unnecessary, as the law clearly requires it to be present in order for a claim to be substantiated. Additionally, the exemption to this requirement that the law offers does not amount to rendering the initial requirement redundant, it merely provides that the standard of proof required should be significantly less in some instances.
Thus, it is clear from these examples that there is much reliance upon the mental elements of the equitable principles, given that the conduct itself essentially relates to a state of mind. It is virtually impossible, it could be argued, to make a determination in regards to dishonestly or knowledge without considering one’s mental intent to rely upon these factors. Therefore, it would be unlikely that one could maintain an argument stating that these mental requirements were unnecessary, as they essentially underpin the court’s ability to make a balanced decision in these circumstances. The cases that were previously discussed illustrate the importance of these requirements to the various breaches that were discussed, and also some exemptions to them in particular circumstances. However, it is also important to note that the exemptions (particularly in relation to dishonest assistance) do not render the original test unnecessary; it merely reduces the standard of proof required in a particular set of circumstances. Thus, it recognises that the law needs to adapt sometimes, while also maintaining the rigidity of the standard for the breach to be proven.
It is clear that, upon analysing the various principles in relation to ‘clogs and fetters’ on the equity of redemption, that both law and equity do play a significant role in orchestrating its applicability. This has predominantly been achieved through the reform of consumer credit and unfair contract legislation, which this brief will consider in more significant detail in due course. In order to conclude as to whether law or equity is the most appropriate forum for the doctrine of redemption to take place, it is important to consider the operations of both in their relevant contexts. This brief will now seek to examine how law and equity have both operated individually, and now draw from each other, in relation to redemption in security transactions.
The equity of redemption has its roots firmly entrenched in days where mortgagees often took advantage of the lesser bargaining power of mortgagors. For example, there is cause to suggest that the equity protection against ‘clogs’ was predominantly aimed at protecting a mortgagor where a mortgagee refused to convey the property on redemption where a mortgagee was merely one day late in making a final payment. As a general rule, the equity of redemption operates as a safety mechanism for a mortgagor to ensure that the property is handed over to him or her upon discharge of the debt when full repayment is received (Santley v Wilde  2 Ch 474). There are a number of examples that exist where courts have sought to preclude the operation of contract terms that unfairly prejudice the mortgagor. These include:
- A term that allows the mortgagee to purchase the mortgaged property at his option (Samuel v Jarrah Timber and Wood Paving Corporation  AC 323 (HL));
- A term conferring a collateral advantage on the mortgagee, especially where that advantage extends beyond the term of the mortgage (Fairclough v Swan Brewery Co Ltd  AC 565 (PC)); and
- A term that is generally ‘oppressive’ to a mortgagor (Cityland and Property (Holdings) Ltd v Marden  Ch 84).
This is an indication of how equity operates to protect a mortgagor from any prejudicial conduct of the mortgagee, and thus often serves to equal up the playing field in this area. It is clear that equity has developed over a significant period of time so as to embrace a vast majority of situations where a mortgagor may be subject to prejudice by a mortgagee. However, what it has not considered is the vast development in this area in recent times, and hence the law has had to develop in order to touch areas where equity was simply unable to reach. This will be considered in more detail in due course. It is important to note that all transactions which involve the offering of some form of security must give the mortgagor the right to redeem the security as the conclusion of the transaction, thus highlighting that notion of protection which was tendered earlier (Grangeside Properties Ltd v Collingwood Securities Ltd  1 WLR 139; Mass v Pepper  AC 102). This shows the importance of the need for the equity of redemption to exist, as it serves to protect the mortgagor from, among other things, any unconscionable dealing on the part of the mortgagee so as to place them in a stronger position in the transaction than the mortgagor (Cityland & Property (Holdings) Ltd. v Dabrah  Ch. 166; Davis v Symons  Ch. 44 in relation to the postponement of the right to redeem). However, as was previously mentioned, this area has developed significantly in recent times in ways that equity was not even equipped to deal with, and hence the law has had to be reformed in order to cope with these developments. These will now be discussed.
In regards to law, it is clear that various laws have been reformed in recent times to enhance their operation, and restrict the reliance upon equity. Perhaps the most relevant is the introduction of the Unfair Terms in Consumer Contracts Regulations 1999, No 2083, which implemented the EC Council Directive 93/13/EC  OJ L95/29. This new provision gives the courts the power to void terms in standard form contracts where those terms are deemed to be unfair. This was applied in the County Court and, while perhaps not a significant case in terms of jurisdiction, it certainly shows that the courts are willing to embrace this notion of contract law reform in terms of mortgages (Falco Finance v Gough (1999) 17 Tr. LR 526;  CCLR 16, CC (Macclesfield)). The introduction of this legislation gives the law more power where equity was solely responsible. While equity was already equipped in certain respects to address issues such as these (Bradley v Carritt  A.C. 253, in relation to a clause affecting the security after redemption), the attempt of the European Council to harmonise national laws in relation to contract has granted the law more life in this respect. However, equity is still generally relied upon by the courts in order to seek clarification and definition, given that the law is still in its infancy stages in this regard. It would be reasonable to assume that once the recent regulations are further defined and elaborated by the judiciary in case law, that there will be more scope to rely on their authority. However, it does show that the rationale behind their introduction is for the law to play a similar role to that of equity in relation to redemption; it will merely take time to achieve this.
Thus, it is clear that the law certainly plays a similar role to equity in relation to overruling unfair contract terms; however it is also clear that the law still has a long way to develop in order to have the same binding effect as equity. Equity has developed over a significant period of time to cater for situations where the law was either unwilling or unable to reach for a variety of reasons; however it now appears that the law is being reformed to address these shortfalls. However, it would be unreasonable to rely upon these legislative definitions at this point in time. The law in this area is not appropriately recognised to warrant dispensing with the equity principles, and thus one should rely on equity until such a time arrives. This time will come once case law has had sufficient opportunity to consider and address the legislation in a typical common law jurisdiction fashion, and thus one should not place too much reliance on the law in this area until this has occurred.
 See also G. Virgo, The Principles of the Law of Restitution (1999), 610.
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