CONSTRUCTIVE TRUSTS AND MISTAKEN PAYMENTS

This post has been contributed by Professor Robert Chambers, Module Convenor for Equity and Trusts.

Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179 is a curious case. The outcome was that money paid by mistake was held in trust for the payers, but the reasons for judgment contain almost no discussion of that important issue. Instead, Lord Sumption’s judgment contains an extensive obiter dictum explaining why a trust would not arise if there had been no mistake. The leading English authority on trusts of mistaken payments has been (and might still be) the 1979 decision of Goulding J in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. It has been the subject of criticism over the years, including an obiter dictum by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12, [1996] AC 669 at 714-15, so some clear guidance from an appellate court would have been welcome.

Angove’s Pty Ltd (“Angove”) is an Australian wine producer. Its UK agent was authorised to collect the proceeds of sale from its UK customers. The agent became insolvent and Angove terminated the agency. Money collected by the agent before the termination belonged to the agent, but money collected after the termination was held in trust for the customers who paid it.

At trial, Judge Pelling QC held “that any sum actually received by the [agent] after the date of termination would be held on trust for the payer”, but gave no authority for that conclusion: [2013] EWHC 215 (Ch) at [43]. This was reversed by the Court of Appeal on the basis that the agency had not been terminated: [2014] EWCA Civ 215. The Supreme Court restored the trial judgment. After deciding that the agency had been terminated, Lord Sumption said at [18]:

“This means that it is strictly speaking unnecessary to deal with the second point, namely whether the funds paid by customers to [the agent] since the commencement of the administration are held in trust for Angove’s. But since the point is of some general importance and has been fully argued before us, I think it right to deal with it. I do so on the assumption that (contrary to the conclusion that I have reached) Angove’s notice of termination was not effective to terminate [the agent’s] authority to collect on the invoices.”

The remainder of his judgment is devoted to this obiter dictum. With no explanation of the trust that did arise in the case, or whether Chase Manhattan was correctly decided, we are left to glean possible answers from the obiter dictum. A key passage is found at [30]:

“The exact circumstances in which a restitutionary proprietary claim may exist is a controversial question which has given rise to a considerable body of judicial comment and academic literature. For present purposes it is enough to point out that where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that that intention was vitiated, for example because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party. One or other of these is a necessary condition, although it may not be a sufficient one.”

The trust must have arisen because Angove’s customers paid the agent “as a result of a fundamental mistake”, believing that the agent still had the authority to collect the money. Presumably, this was sufficient to give rise to a trust, since no other factors appear to be relevant.

The suggestion that fraud or theft can give rise a trust for the victim is also helpful. That has long been accepted in Australia (Black v S Freedman & Co [1910] HCA 58, 12 CLR 105; Evans v European Bank Ltd [2004] NSWCA 82, 61 NSWLR 75), but has never been settled in England.

Another significant feature of the obiter dictum is the continued rejection of the remedial constructive trust by English Courts. Lord Sumption said at [27]:

“English law is generally averse to the discretionary adjustment of property rights, and has not recognised the remedial constructive trust favoured in some other jurisdictions, notably the United States and Canada. It has recognised only the institutional constructive trust”.

He quoted Lord Browne-Wilkinson’s definition of a remedial constructive trust, in Westdeutsche at 714-15:

“It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court.”

This is contrasted with “an institutional constructive trust”, which “arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past”: Lord Browne-Wilkinson in Westdeutsche at 714.

There is still much work to be done to identify all the circumstances that can give rise to a constructive trust in English law.  While it would have been more helpful if the Supreme Court had explained clearly why the trust did arise in Angove’s Pty Ltd v Bailey, we can be guided by Lord Sumption’s thoughts on why a trust would not have arisen in the absence of a mistake.