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Essays in Conveyancing and Property Law

 | 
Frankie McCarthy
, 
James Chalmers
, 
Stephen Bogle

Defects in Acquisition and How to Fix Them

6. Property Law, Fiduciary Obligations and the Constructive Trust

Lord Hodge

Texte intégral

A. Sharp, Burnett and the General Principles of Insolvency Law

  • 1 1996 SC (HL) 66.

1Insolvency is the acid test of property rights. Bankruptcy law and the law of corporate insolvency give – or should give – definitive answers to the question “who owns what?” It was in the quest for such definitive answers that I first befriended Robert Rennie. And over the years he has taken great delight in introducing me at his annual dinner for the brightest students in his property law honours class at the University of Glasgow as counsel on the losing side in Sharp v Thomson.1

2In that case I was junior counsel for the receivers of Albyn Construction Ltd and Robert gave expert advice to the purchasers of a basement flat at 10 Whinhill Road, Aberdeen, or (as I suspect) the professional indemnity insurers of their solicitors. The flat was a modest property for which the purchasers paid only £40,000 in 1990. But it was not the flat itself that was the object of the litigation. Rather the insolvency profession wanted some clarity in the rules of insolvency law on the transfer of ownership) of heritable property: did real rights matter? What the insolvency practitioners wanted was a case involving personal bankruptcy in order to test whether there was a race to the register between the trustee in sequestration and the disponee. But such cases occur only very rarely as it requires the purchaser’s solicitor to be very dilatory before a trustee can get to the register first. As a result, the only case which arose at that time as a vehicle for testing the issue of property law was Sharp v Thomson, which, as is well known, had the added complication that it involved a floating charge.

  • 2 1995 SC 455.
  • 3 W A Wilson, “Floating Charges” 1962 SLT (News) 53.

3That complication proved fatal to the receivers’ case in the House of Lords. Having obtained a magisterial judgment from Lord President Hope in the First Division on the structure of the Scots law of property,2 an opinion which will stand the test of time, our ship foundered in London on the rock of the floating charge. Such a charge was imported from English law in which it operates in equity as an equitable security. As Professor W A Wilson set out in an article in the Scots Law Times in 1962,3 the floating charge was also capable of analysis in a way that was consistent with traditional Scots insolvency law. However, such an analysis appeared strange, indeed shocking, to an English Chancery judge who was used to equity looking on that as done which ought to have been done. In particular, in the contract of sale of land equity would have transferred the beneficial interest in the land to the disponee, thereby protecting him from the seller’s insolvency. Thus, after Colin Campbell QC (now Lord Malcolm) had made a very skilful indeed brilliant – speech in opening his appeal, my senior, Ronald Mackay QC (now Lord Eassie) faced a bench which was hostile to his arguments. At one point when he was being assailed on all sides, we heard the mournful sound of bagpipes from a boat on the Thames. Ronald Mackay suggested to the court that it was a lament for Scots property law.

  • 4 2004 SC (HL) 19; 2002 SC 580 (Inner House); 2000 SLT (Sh Ct) 116 (Sheriff Principal).

4Several years later, the insolvency profession had an opportunity to revisit the issue when, most unusually, the question arose in a personal insolvency: was there a race to the register between the disponee and the trustee in sequestration? I was not involved at first instance but came into the case, Burnett’s Trustee v Grainger,4 on an appeal to the sheriff principal. Again, the disputed property was not of great value but the action served as a vehicle to clarify the law. The issue was stark: did the property, to which the seller retained title, fall within the sequestration of his estates after he had received the purchase price and had delivered the disposition to the purchaser?

  • 5 (1847) 9 D 932 at 945.

5Reading the judgments of the House of Lords in Burnett’s Trustee one can gain the impression that the case was concerned solely with personal insolvency legislation. In a sense that is true because the central rules of the Scots law of personal insolvency are statutory. But in reality it concerned the building blocks of Scots property law. In particular, the judgment of the House of Lords supported the clear distinction between the law of property and the law of obligations which is common to many legal systems which have been strongly influenced in their structure by Roman law. It reaffirmed the decision of the whole bench of the Court of Session in Young v Leith that:5

[A] completed real right, good in a question between granter and grantee, and bad against all the rest of the world, is an absolute legal contradiction in terms.

6I believe that the exercise of clarification, which the insolvency profession initiated, will bring lasting benefits to Scots law. The distinction between real rights and personal rights, which is the hallmark of civilian legal systems, gives a simple and principled framework to property law. It can readily be understood by the non-specialist lawyer and provide a simple template for legal analysis. But that does not mean that we should become obsessed about real rights and personal rights and treat as heretical or unprincipled any reform proposal which creates an exception to general rules. The effect of Sharp v Thomson is that a floating charge will not attach property for which a disponee has paid the purchase price and of which the disposition has been delivered. It is an exception to the general rule in insolvency that priority in insolvency is determined by the prior acquisition of the real right. That exception can be justified by the unusual nature of the floating charge, both in its origin as an equitable charge in English law and also in the way it creates a real right in security over land without registration in the Land Register. To deny the ability of the law to create exceptions to general rules would be to introduce inflexibility. It would risk consigning Scots property law and commercial law to an ossuary. In my view the real value of the clarification which Sharp and Burnett’s Trustee have provided is that there is a clear structure which law reformers can use to develop our law.

B. Exceptions to the General Principles

7The effect of the floating charge in Burnett’s Trustee is not the only departure from the general rules of insolvency law. There are also special rules for transactions specifically induced by the debtor’s fraud and also for trusts.

  • 6 Bell, Comm I, 309-10; Mansfield v Walker’s Trustees (1835) 1 Sh & Macl 203; A W Gamage Ltd v Charle (...)
  • 7 J M Thomson, “Fraud,” in The Laws of Scotland: Stair Memorial Encyclopaedia, vol 11 (1990) para 778 (...)

8The title of a debtor which has been acquired through fraud is voidable in the hands of an attaching creditor and thus also in the debtor’s insolvency.6 In such cases fraud passes against creditors. But the scope of the doctrine is not clear; fraud in a contract is not a vitium reale. Professor Thomson suggests that it is only where the insolvent’s fraud specifically induced the transfer of the ownership of the property, which would not otherwise have passed, that the property will not fall to the trustee in sequestration.7

  • 8 Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43.
  • 9 Bankruptcy (Scotland) Act 1985, s 33 (1)(b).
  • 10 Lord Malcolm has recently supported this analysis: Glasgow City Council v The Board of Managers of (...)

9It is well established in our law that property which a debtor holds in trust for another does not fall within the sequestration of the debtor’s estate. That rule extends to land and to latent trusts,8 and since 1985 has been the subject of a statutory provision.9 Until recently, Scots lawyers and South African lawyers have analysed the right of the beneficiary as an unusual personal right against the trustee which prevails in the latter’s insolvency – the protected personal right. Recently, it has become more fashionable to analyse trust rights in terms of a separate patrimony. The trustee has separate patrimonies. He has his own patrimony, which comprises his personal assets and liabilities, and a separate trust patrimony which comprises the assets and liabilities of the trust.10

  • 11 Bank of Scotland v Liquidators of Hutchison, Main & Co Ltd 1914 SC (HL) 1; Gibson v Hunter Home Des (...)
  • 12 (1835) 1 Sh & Macl 203.
  • 13 Mansfield (n 6) at 338-39.

10It is also well settled in Scots law that an obligation to assign a security over property or an obligation to grant a conveyance does not create a trust in respect of that property.11 This rule is of central importance to the Scots law of property and distinguishes it from English property law in a fundamental way. In Mansfield v Walker’s Trustees,12 Lord Brougham pointed out the absence of equitable estates in Scotland and described English equitable titles thus:13

An agreement to convey an estate for a valuable consideration executed is with us, to all substantial purposes, a conveyance which vests the property in the purchaser. … Whatever is covenanted to be done is held in equity as done, so that a title by mere agreement is quite as paramount to any subsequent incumbrance, or other puisne title, as a legal conveyance. This is not the law of Scotland.

  • 14 [2014] UKSC 45. I had the pleasure of sitting on the panel for the case and also prepared a briefin (...)

11The last sentence is of central importance. The absence in Scots law of that rule of equity has generated academic controversy as to the scope of a constructive trust to confer rights which would prevail in a debtor’s insolvency. In the rest of this essay I consider that question in the context of a recent decision of the UK Supreme Court on the English law of constructive trust: FHR European Ventures LLP v Cedar Capital Partners LLC.14

C. The Constructive Trust in Scots Law

(1) FHR European Ventures LLP v Cedar Capital Partners LLC

12FHR was a joint venture vehicle for the purchase of the issued share capital of Monte Carlo Grand Hotel SAM, for which the joint venture paid €211.5 million. Cedar acted as FHR’s agents in negotiating the purchase and owed fiduciary duties to FHR. Unknown to FHR, Cedar also entered into an exclusive brokerage agreement with the vendors by which it became entitled to a fee of €10 million following the successful conclusion of the sale and purchase. The sale went ahead and the vendors paid Cedar that fee. FHR on learning of the payment sought to recover it from Cedar.

13The practical issue in FHR was whether a principal of an agent who had breached his fiduciary duty by taking an undisclosed commission could assert a proprietary remedy against a third party to which, it was asserted, the agent had transferred the money. The legal question was whether a bribe or secret commission received by an agent was held by the agent on trust for his principal; or did the principal merely have a claim against the agent for equitable compensation in a sum equal to the bribe or commission?

  • 15 [1998] Ch 1 at 18.

14Lord Neuberger delivered the unanimous judgement of the court, holding that Cedar held the secret commission on trust for FHR. He set out three principles from the judgment of Millett LJ in Bristol and West Building Society v Mothew,15 namely:

  1. an agent owes a fiduciary duty to his principal because he has undertaken to act for or on behalf of the principal in circumstances which give rise to a relationship of trust and confidence;

  2. an agent must not place himself in a position in which his duty and his interest may conflict, and as part of this rule, the agent must not make a profit out of his trust; and

  3. a fiduciary who acts for two principals with potentially conflicting interests breaches his obligation of undivided loyalty unless he has obtained the informed consent of both following full disclosure.

  • 16 See, in relation to (ii), for example Hamilton v Wright (1839) 1 D 668 (Lord Cockburn at first inst (...)
  • 17 [1967] 2 AC 134 (Note).

15A Scots jurist can readily assent to those principles.16 So also can he or she agree with the well-established principle that where an agent receives a benefit in breach of his fiduciary duty, the agent is obliged to account to the principal for such a benefit: Regal (Hastings) Ltd v Gulliver17 has frequently been relied on in commercial cases in Scotland. In English law the agent must pay a sum equal to the profit by way of equitable compensation; Scots law does not speak of equitable compensation but the obligation to account and pay is clear.

  • 18 Keech v Sandford (1726) Sel Cas Ch 61; Cook v Deeks [1916] 1 AC 554; Phipps v Boardman [1967] 2 AC (...)

16In English law, where an agent acquires a benefit, which came to his notice as a result of his fiduciary position, he is treated in equity as having acquired the benefit on behalf of the principal. Thus the thing acquired is beneficially owned by the principal because the general rule is that equity treats as done that which ought to have been done. This rule is strictly applied in favour of the principal so that the agent must disgorge a benefit even if the principal could not otherwise have acquired it.18

  • 19 FHR (n 14) at paras 15-28.
  • 20 [1994] 1 AC 324.
  • 21 R Goode, “Proprietary Restitutionary Claims” in W R Cornish and G Virgo (eds) Restitution: Past, Pr (...)
  • 22 S Worthington, “Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Form (...)
  • 23 P Millett, “Bribes and Secret Commissions” [1993] RLR 7-30; P Millett, “Bribes and Secret Commissio (...)
  • 24 L Smith, “Constructive Trusts and the No-profit Rule” (2013) 72 CLJ 260-63.
  • 25 Further valuable contributions to the debate include G Virgo, “Profits Obtained in Breach of Fiduci (...)
  • 26 T Etherton, “The Legitimacy of Proprietary Relief” (2014) 2 (1) Birkbeck Law Review 59-86, 62.

17But what is the legal basis of the principal’s claim when a bribe or secret commission, unlike an emerging business opportunity which an agent wrongfully diverts from his principal, is something which the principal would not have received if the agent had complied with his fiduciary duty? In the past English case law has not spoken with one voice on whether a principal enjoys a proprietary remedy in relation to bribes and secret commissions, as Lord Neuberger’s judgment in FHR shows.19 More recently the Privy Council in Attorney General for Hong Kong v Reid20 held that bribes which had been paid to a corrupt police officer were held on trust for his principal and could therefore be traced into properties which the policeman had acquired in New Zealand. There has also been a very learned academic debate with powerful jurists on each side. On the one hand Professor Sir Roy Goode21 and Professor Sarah Worthington22 among others have argued that the principal has no proprietary interest in such a bribe or commission while Lord Millett23 and Professor Lionel Smith24 among others have argued that an agent who obtains any benefit in breach of his fiduciary duty holds that benefit on trust for his principal.25 Many other articles have been published in what Sir Terence Etherton described as “this relentless and seemingly endless debate.”26

  • 27 FHR (n 14) at para 35.

18FHR gives an answer to this debate for the purposes of English law. A principal enjoys a proprietary remedy against his agent in relation to benefits such as bribes which were not derived from the principal’s assets or from assets which should have been the property of the principal. In the case of FHR one might readily assume that the vendor would have accepted a lower price for the shares in the hotel company if it had not had to pay the commission; but the rule did not turn on evidence that the purchaser had suffered any loss. The rule is simple: “any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for his principal.”27 Thus the principal can require the agent to account for any such benefit or he can claim the beneficial ownership of the funds or assets which the agent has obtained. The principal may also trace or follow in equity the proceeds of the bribe or commission in the hands of knowing recipients, a remedy which would not be available unless he had a proprietary claim. Lord Neuberger observed that this view was consistent with other common law jurisdictions, notably Australia, New Zealand, Singapore and the United States of America.

(2) Remedies for breach of fiduciary duty in Scots law

19Where does Scots law stand on this issue?

  • 28 Parker v McKenna (1874) 10 Ch App 96 at p 124.

20Agency plays a central role in our commercial life. Company directors, solicitors, financial advisers, commercial representatives and many others operate through the law of agency. While James LJ may have been guilty of overstatement when he suggested that the “safety of mankind” required the enforcement of the no profit rule without any inquiry as to whether the principal had suffered loss,28 the strict enforcement of an agent’s duty of loyalty plays a vital role in our commercial law. The “no conflict” and “no profit” rules are essential components of the law of agency and are well vouched in Scots law. An agent who profits from his agency in breach of his fiduciary duty must disgorge his profits to his principal. That is not in doubt. But there is uncertainty in Scots law as to the legal mechanisms by which a principal can obtain a remedy for a breach of fiduciary duty.

21The discussion in the English case of FHR is useful as it focused on three different circumstances in which an agent may act in breach of his fiduciary duty. They were:

  1. Where the agent has used the principal’s property – including property which the agent holds on trust for his principal – to make a profit for himself;

  2. Where the agent uses his position or knowledge as an agent to divert from his principal an emerging business opportunity; and

  3. Where the agent takes a bribe or secret commission from another party.

22The Supreme Court has ruled that in each case English law allows the principal a proprietary remedy which prevails in the agent’s insolvency and also allows equitable tracing.

  • 29 Mansfield (n 6).
  • 30 York Buildings Co v MacKenzie 13 May 1795, 3 Pat 378, Lord Thurlow at 393; Hamilton v Wright (1839) (...)
  • 31 J McLaren, Wills and Succession, 3rd edn (1894) para 1926f; A Mackenzie Stuart, The Law of Trusts ( (...)
  • 32 D M Ross et al, “Trusts, Trustees and Judicial Factors,” in The Laws of Scotland: Stair Memorial En (...)

23A Scots lawyer may have difficulty in seeing a basis for a proprietary claim in the second and third circumstances because Scots law has no equitable rule treating as done that which ought to have been done.29 Nonetheless, there are several statements in Scots cases30 and in textbooks31 that suggest that a constructive trust may arise where a person in a fiduciary position breaches his duty to his principal. Thus in volume 24 of the Stair Memorial Encyclopaedia the learned authors state:32

A constructive trust arises from circumstances where a person in a fiduciary position derives a benefit from that position or a trustee makes a profit from carrying on the truster’s business.

  • 33 Ross et al, “Trusts” (n 33) para 30, fn 1, referring to McLaren, Wills (n 31) para 1517.

24But, as those authors acknowledge, it is not clear what is meant by “constructive trust;” and they refer to McLaren’s comment that a constructive trust is “merely another name for the duty of restitution, which may be enforced against a party acquiring property dishonestly or in breach of trust.”33

25In this essay I do not use the term “constructive trust” in that wider sense. Nor do I discuss the remedial constructive trust, which some common law jurisdictions recognise but English law does not. Rather, I concentrate on the institutional constructive trust in English law which arises by operation of law and which may exclude the assets held on trust from the insolvency of the fiduciary and the third party recipient. Does Scots law have such a trust arising from a fiduciary relationship? If so, what is its scope?

  • 34 Clydesdale Banking Co v Paul (1877) 4 R 626; Thomson v Clydesdale Bank (1893) 20 R (HL) 59; New Min (...)
  • 35 Style Financial Services Ltd v Bank of Scotland 1996 SLT 421; Bank of Scotland v Macleod Paxton Woo (...)
  • 36 N R Whitty, “The ‘No Profit from Another’s Fraud’ Rule and the ‘Knowing Receipt’ Muddle” 2013 Edin (...)
  • 37 2010 SC 156.
  • 38 New Mining (n 34).
  • 39 The giving of valuable consideration is no defence if the third party is in bad faith: Clydesdale B (...)

26Before examining authorities which address directly the existence of such an institutional constructive trust, it may be useful to look at other remedies which Scots law provides in order to provide context for that examination. It is an established principle of Scots law that no man may profit from another’s fraud;34 and that has been extended to a principle that no man may profit from another’s breach of fiduciary duty.35 Professor Niall Whitty has discussed this in some detail in his powerful and convincing critique36 of the First Division’s novel reliance on the English doctrine of “knowing receipt” in Commonwealth Oil & Gas Co Ltd v Baxter.37 In short, if a trustee or other fiduciary profits from his office without the informed consent of the beneficiary or principal, the latter can demand an accounting and insist upon the performance of the trust or fiduciary obligation by transfer of the profit or asset to the trust patrimony or to the principal. This is a personal claim which is part of the law of obligations rather than a proprietary claim. Where the property in question is transferred to a third party, the beneficiary or principal will in many cases have a personal claim against the third party recipient where the third party has received the property (i) gratuitously or (ii) in bad faith with notice of the fraud or breach of fiduciary duty. In the first case (gratuitous transfer) the beneficiary or principal has a claim for restitution in our law of unjustified enrichment;38 in the second case (bad faith) he can rely on the “no profit from another’s breach of fiduciary duty” principle.39 Thus where no claim is being made to recover an asset in the insolvency of the fiduciary or of the third party recipient, Scots law has remedies in its law of obligations which do not depend on the concept of the constructive trust.

  • 40 G L Gretton, “Constructive Trusts” 1997 Edin LR 281-316 and 408-19.
  • 41 1994 SLT 682.
  • 42 [1893] 2 QB 390.

27That has not prevented judges and jurists from using language that suggests that personal remedies against the fiduciary and a third party recipient arise as a result of a constructive trust. Professor George has demonstrated in his article, “Constructive Trusts” that most of the cases cited in connection with constructive trusts concern other aspects of fiduciary relations.40 Even the comparatively recent case of Huisman v Soepboer,41 could be said not to be concerned with an institutional constructive trust which had effect on insolvency. The case concerned a claim by a partner for a profit share of a joint venture to purchase and resell a farm. Huisman sued one of his co-venturers, Soepboer, and also a company controlled by the first defender. Soepboer had taken title to the farm in the name of the company contrary to the terms of the joint venture agreement. Huisman sought a joint and several decree against Soepboer and the company for payment of the profit share on the sale of the farm on the basis that the company obtained its title in bad faith. Lord Penrose upheld the relevancy of the claim and, relying on the English case of Soar v Ashwell42 and Scottish textbooks, held that there might be a constructive trust and that the company might be liable jointly and severally with Soepboer. In my view it was not necessary to attribute that liability to the existence of a constructive trust, as Lord Penrose did. The joint and several liability of the defenders could rest on the principle of no profit from a breach of fiduciary duty.

  • 43 (1886) 14 R 266, Lord Kinnear at 270; (1886) 15 R (HL) 45, Lord Watson at 48.
  • 44 1907 SC 445.
  • 45 Sharp (n 2) at 480H-481B.

28There are other cases where the Scottish courts have asserted the existence of a trust but have not analysed the meaning of the deemed trust or its effect, if any on the insolvency of the deemed trustee. For example, there is a suggestion in United Horse Shoe and Nail Co Ltd v Stewart & Co43 that a claim for the profits arising from an infringement of a patent is based on treating the infringer as if he were a trustee for the patentee. In Stevenson v Wilson44 the trustee in sequestration of a partnership sold shares in a private company, the purchaser paid the price but the directors refused to register him as the proprietor of the shares and the vendor declined either to rescind the sale and repay the price or to receive the dividends on the purchaser’s behalf. The First Division treated the vendor as a quasi-trustee and upheld a declarator that the purchaser had the sole beneficial right, title and interest in the shares and dividends. The opinions in the Outer House and Inner House contained no detailed discussion of relevant authorities and the decision seems a pragmatic way of forcing the trustee in sequestration to annul the contract if he wished to wind up his administration of the bankrupt estate. I agree with Lord Hope’s view45 that the circumstances of that case were special and they do not ground any general rule.

  • 46 Professor George Gretton (n 40) argued for the abolition of the constructive trust but did not disp (...)

29But there is also clear authority in Scots law for the existence of an institutional constructive trust as an incident of a fiduciary relationship.46 In my view the cases where the court has treated money or assets which a solicitor or factor has received from his client for a specific purpose as belonging to a separate patrimony and thus excluded from the former’s insolvency are consistent with an implied trust or an institutional constructive trust.

  • 47 (1872) 11 M 33. See also Blyth v Maberley’s Assignees (1832) 10 S 796.

30Thus in Macadam v Martin’s Trustee47 a solicitor received funds for investment in a heritable security but died before making the investment. The First Division excluded the funds from the solicitor’s insolvency because they had been acquired for a specific purpose and had to be applied for that purpose or returned to the owner.

  • 48 (1902) 4 F 739.
  • 49 Colquhoun ’s Trustee (n 48) at 742.

31In Colquhoun’s Trustee v Campbell’s Trustees48 the court was faced with an insolvency. A solicitor was instructed by two clients to obtain securities over land for advances which the clients made to a third party. The solicitor received bonds and dispositions in security from the third party borrower in favour of his clients but did not record them. Instead, shortly before his and his firm’s insolvency, he obtained an ex facie absolute disposition in favour of his firm and recorded it. The estates of the solicitors’ partnership and the partners were sequestrated; prior bondholders sold the security subjects and there was a competition in a multiplepoinding between the trustee in sequestration and the clients for the balance of the sale price. The Lord Ordinary, Lord Kyllachy, held that the bankrupt firm and the trustee in sequestration were both disabled from taking the benefit of the solicitor’s breach of trust. His reasoning was that there was a constructive trust. He stated:49

For it being once conceded that as between a law-agent and his client there is a fiduciary relation, the result of what took place here was in law really this: The bankrupts being bound under their trust to complete their clients’ security by recording the bonds, must be held in law to have taken and recorded the subsequent absolute disposition primarily for their clients, and only in reversion for themselves. In short they must be held to have done in the matter what it was their duty to do. In that view, the absolute disposition was at the date of their sequestration held primarily in trust for the two competing claimants.

32The First Division upheld his judgment. The Lord President (Kinross), with whom Lord McLaren concurred, adopted the Lord Ordinary’s reasoning: the solicitor was guilty of a fraudulent breach of trust and the trustee in sequestration was in no better position; accordingly the absolute disposition was held on trust primarily for the clients. Lord Kinnear also agreed with the judgment of the Lord Ordinary but relied on the principle that the creditors of the bankrupt and thus the trustee in sequestration could not take advantage of his fraud.

  • 50 (1904) 6 F 1028.

33Jopp v Johnston’s Trustee50 is perhaps the best known of these cases. A solicitor who had been granted a factory and commission, sold shares on behalf of his client and deposited the proceeds in his personal account. The funds were mixed with his private money in the bank account. He later withdrew funds and placed them on deposit receipt. Later he died insolvent. The Second Division treated the deceased solicitor as having been in the position of a trustee in relation to his client’s funds, which did not form part of his sequestrated estate. The client was therefore able to follow the funds into the deposit receipts and recover the sums that remained on deposit.

  • 51 1959 SLT 71.
  • 52 He referred to Bell, Comm I, 286 (in which Bell relied on English authorities for the principle tha (...)

34In Newton’s Executrix v Meiklejohn’s Judicial Factor51 a stockbroker, who had purchased shares on behalf of his client pledged those and other shares to a bank under a general letter of hypothecation in security for advances which he received. After his death a judicial factor was appointed under s 163 of the Bankruptcy (Scotland) Act 1913. Lord Guest held that the client’s executrix was entitled to a preferred ranking on the sale proceeds in the insolvency.52

  • 53 1991 SLT 83. Dr Parker Hood commented on the case in 1994 SLT (News) 265-68.
  • 54 Gretton (n 40) 296-97.

35In Southern Cross Commodities Property Ltd v Martin53 Lord Milligan held that the pursuers were entitled to a declaration that a heritable property, which had been purchased with the pursuers’ funds which two of its directors had misappropriated and whose title was in the name of another company under the directors’ control, was held on a constructive trust. It is true, as Professor Gretton has argued,54 that the court was concerned solely with the obligational issue of the transfer of the property to the pursuer company and not any claim against the unsecured creditors of the title-holding company which was not insolvent. But both counsel and the judge proceeded on the basis that the directors’ fiduciary position and their breach of fiduciary duty could make the title holding company, which was their creature, a constructive trustee.

  • 55 Unreported, 2 August 1991; summarised 1991 GWD 30-1772.

36In Sutman International Inc v Herbage55 the directors of a company, who were a husband and wife, misappropriated funds of their company and invested them in heritable property. The husband became insolvent and his estates were sequestrated. The company and its liquidator sought a declarator against the couple and the husband’s trustee in sequestration that the company was the true beneficial owner of the property. Lord Cullen held that the directors had misappropriated the company’s funds and that made the declaration.

37In those cases the Scottish courts have recognised an institutional constructive trust, as I have described it, in contexts where persons who were under fiduciary obligations, held property of their clients or company.

  • 56 2014 SC 579.
  • 57 Ted Jacob Engineering (n 56) at para 99.
  • 58 Lord Neuberger, “The Remedial Constructive Trust – Fact or Fiction,” The Banking Services and Finan (...)
  • 59 If a remedial constructive trust were not to protect against a defender’s insolvency, it would add (...)

38In Ted Jacob Engineering Group Inc v RMJM56 Lord Drummond Young, in a careful judgment which focused on comparative law, explained the different approaches of Scots law and English law to the law of trusts and highlighted their functional equivalence. He discussed remedies for breach of trust and also for breach of fiduciary duty in an agency relationship and concluded that the constructive trust undoubtedly exists in Scots law.57 He suggested that a constructive trust might be a form of remedy which the courts could refuse if it would produce an unfair result. I have some difficulty with this suggestion, because in principle it should not be a matter of discretion whether a trust exists. But I am not at all attracted by a more generalised notion of a remedial constructive trust, which Lord Neuberger in a recent lecture suggested “displays equity at its flexible flabby worst.”58 If the courts were able retrospectively to impose a trust as a remedy, this would come at a high price to the predictability of our law of insolvency, which is of central importance to our commercial law and to people who do business in Scotland.59

  • 60 1996 SLT 851.
  • 61 See also NZ Netherlands Society “Oranje” Inc v Keys [1973] 1 WLR 1126, Lord Wilberforce at 1130-31 (...)

39In Scots law the institutional constructive trust exists in the context of a fiduciary relationship which most commonly is agency. But it also clear that not every aspect of the relationship between a principal and an agent involves fiduciary obligations. In particular, parties can enter into contracts within an agency relationship which do not give rise to fiduciary obligations. Thus in Style Financial Services Ltd v Bank of Scotland (No 2)60 Style collected and held funds for the retailer, Goldberg. Style were Goldberg’s agents but Lord Gill, on analysis of the contractual documents, held that they had a debtor/creditor relationship with Goldberg in relation to the funds.61

  • 62 1989 SLT 718.

40Many commercial arrangements in which one person holds the property of another do not involve any fiduciary relationship. In Raymond Harrison & Co’s Trustee v North West Securities Ltd62 a hirer sold the property of the lessor without its authority and in breach of the leasing agreement. The lessor sought to claim the sale proceeds in the hirer’s insolvency, arguing that they were held on a constructive trust. But Lord Clyde held that the contract of hire did not give rise to a fiduciary relationship which might ground a constructive trust over the leased cattle or the proceeds of their sale.

(3) The constructive trust in Scots law

41Where does all this lead? It is clear that in Scots law an institutional constructive trust does not arise in the transfer of property, whether or not registration is needed to complete the transfer. The institutional constructive trust arises from a fiduciary relationship. It is important, in order to maintain coherence in Scots law to confine fiduciary obligations to relationships where they are appropriate; and that is where the agent owes the principal a duty of loyalty giving rise to the three principles which I have quoted above from Bristol and West Building Society v Mothew. There is, as I have said, no general rule in Scots law that equity treats as done what is covenanted to be done. Mansfield v Walker’s Trustees has long been authority for the absence of that rule of equity in Scots law in relation to the transfer of property. But the rule is relevant to the law of trusts and, I would suggest, in the analogous obligations of a fiduciary.

  • 63 This would apply event where the principal could not benefit from the opportunity (n 20).
  • 64 The battle lines appear to be between equity lawyers on the one hand and restitution and commercial (...)

42Looking at the three categories or circumstances that the court discussed in FHR, it seems to me that Scots law can readily recognise that where an agent in a fiduciary context makes a profit from the use of his principal’s property, the fruits of that use are held on trust for the principal. That is consistent with what Bell suggested in Commentaries I. 286 and the cases which I have cited since Macadam v Martin’s Trustee. The second category – where the agent diverts an emerging business opportunity from his principal – has long been treated in English law as giving rise to a proprietary claim. From the viewpoint of Scots property law, there is nothing proprietary about such a claim. But if it is an incident of the duty of loyalty which a fiduciary owes that the law treats as done what ought to have been done, then there may be scope in an appropriate case to hold that the opportunity is held on trust for the principal and thus does not fall within the agent’s insolvency.63 The claim which is the least obviously “proprietary” is the claim for a secret commission or bribe. That is why there has been such an extensive academic debate in England,64 to which the Court of Appeal and the Supreme Court referred in FHR. Again, in Scots law, a property law analysis would lead one to reject the claim. But the result which English law has arrived at could be justified in Scots law if – as in FHR – the court were to treat the obligation of undivided loyalty as requiring the fiduciary to disgorge his profit to his principal and the equitable principle as treating that disgorgement as having occurred.

43It will be for the courts to decide in a future case whether or not Scots law recognises the existence of a constructive trust in the second and third circumstances discussed in FHR. On the one hand there are policy arguments that the parity in ranking of unsecured creditors should prevail: the principal is such a creditor, unless the law creates a constructive trust. On the other hand there are considerations of commercial policy which point towards the incidents of agency being similar within the United Kingdom economy. Scots law is a mixed legal system that can adapt to such policy considerations and can, as I have argued, make exceptions within a clear conceptual framework. But if the latter policy were to find favour, the coherence of Scots law would be greatly assisted if (i) both the equitable principle of treating as done what ought to have been done and the constructive trust are strictly confined to circumstances in which fiduciary duties are owed, (ii) such duties arise only where a person is acting on behalf of another in a relationship of trust and confidence and (iii) the courts are astute not to invent such a relationship where it does not exist.

Notes

1 1996 SC (HL) 66.

2 1995 SC 455.

3 W A Wilson, “Floating Charges” 1962 SLT (News) 53.

4 2004 SC (HL) 19; 2002 SC 580 (Inner House); 2000 SLT (Sh Ct) 116 (Sheriff Principal).

5 (1847) 9 D 932 at 945.

6 Bell, Comm I, 309-10; Mansfield v Walker’s Trustees (1835) 1 Sh & Macl 203; A W Gamage Ltd v Charlesworth’s Trustee 1910 SC 257.

7 J M Thomson, “Fraud,” in The Laws of Scotland: Stair Memorial Encyclopaedia, vol 11 (1990) para 778; K G C Reid, “Property” in The Laws of Scotland: Stair Memorial Encyclopaedia, vol 18 (1993) para 694.

8 Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43.

9 Bankruptcy (Scotland) Act 1985, s 33 (1)(b).

10 Lord Malcolm has recently supported this analysis: Glasgow City Council v The Board of Managers of Springboig St John’s School [2014] CSOH 76 at paras 16 and 17. So also has Lord Drummond Young in Ted Jacob Engineering Group Inc v RMJM 2014 SC 579 at para 90. See also Scottish Law Commission, Report on Trust Law (Scot Law Com No 239, 2014) para 3.4.

11 Bank of Scotland v Liquidators of Hutchison, Main & Co Ltd 1914 SC (HL) 1; Gibson v Hunter Home Designs Ltd 1976 SC 23.

12 (1835) 1 Sh & Macl 203.

13 Mansfield (n 6) at 338-39.

14 [2014] UKSC 45. I had the pleasure of sitting on the panel for the case and also prepared a briefing note for my colleagues on what might be the approach of Scots law in such circumstances.

15 [1998] Ch 1 at 18.

16 See, in relation to (ii), for example Hamilton v Wright (1839) 1 D 668 (Lord Cockburn at first instance) (1842) 1 Bell’s App Cas 574; Aberdeen Railway Co v Blaikie Brothers (1853) 1 Macq 461; Magistrates of Aberdeen v University of Aberdeen (1877) 4 R (HL) 48. See also Laura Macgregor’s discussion of fiduciary duty in chapter 6 of her admirable book, The Law of Agency in Scotland (2013), including her discussion of the constructive trust at para 6.38ff.

17 [1967] 2 AC 134 (Note).

18 Keech v Sandford (1726) Sel Cas Ch 61; Cook v Deeks [1916] 1 AC 554; Phipps v Boardman [1967] 2 AC 46; Bhullar v Bhullar [2003] 2 BCLC 241.

19 FHR (n 14) at paras 15-28.

20 [1994] 1 AC 324.

21 R Goode, “Proprietary Restitutionary Claims” in W R Cornish and G Virgo (eds) Restitution: Past, Present and Future (1998), ch 5; R Goode, “Property and Unjust Enrichment” in A Burrows (ed), Essays on the Law of Restitution (1991) ch 9; R Goode, “Proprietary Liability for Secret Profits – A Reply” (2011) 127 LQR 493-95.

22 S Worthington, “Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae” [2013] CLJ 720-52.

23 P Millett, “Bribes and Secret Commissions” [1993] RLR 7-30; P Millett, “Bribes and Secret Commissions Again” [2012] CLJ 583-614.

24 L Smith, “Constructive Trusts and the No-profit Rule” (2013) 72 CLJ 260-63.

25 Further valuable contributions to the debate include G Virgo, “Profits Obtained in Breach of Fiduciary Duty: Personal or Proprietary Claim?” (2011) 70 CLJ 502-04 and D Hayton, “Proprietary Liability for Secret Profits” (2011) 127 LQR 487-93.

26 T Etherton, “The Legitimacy of Proprietary Relief” (2014) 2 (1) Birkbeck Law Review 59-86, 62.

27 FHR (n 14) at para 35.

28 Parker v McKenna (1874) 10 Ch App 96 at p 124.

29 Mansfield (n 6).

30 York Buildings Co v MacKenzie 13 May 1795, 3 Pat 378, Lord Thurlow at 393; Hamilton v Wright (1839) 1 D 668, Lord Cockburn at 673 (an obiter dictum as Wright was a trustee under an express trust); Laird v Laird (1858) 20 D 972, Lord President McNeill at 981 (again obiter); Aberdeen Railway Co v Blaikie Brothers (1853) 1 Macq 461 in which it was suggested by the Lord Chancellor and Lord Brougham that the laws of Scotland and England were essentially the same in relation to fiduciary relationships.

31 J McLaren, Wills and Succession, 3rd edn (1894) para 1926f; A Mackenzie Stuart, The Law of Trusts (1932) 37-38; W A Wilson and A G M Duncan, Trusts, Trustees and Executors, 2nd edn (1995) para 6.5-6.81.

32 D M Ross et al, “Trusts, Trustees and Judicial Factors,” in The Laws of Scotland: Stair Memorial Encyclopaedia, vol 24 (1990) para 30.

33 Ross et al, “Trusts” (n 33) para 30, fn 1, referring to McLaren, Wills (n 31) para 1517.

34 Clydesdale Banking Co v Paul (1877) 4 R 626; Thomson v Clydesdale Bank (1893) 20 R (HL) 59; New Mining and Exploring Syndicate Ltd v Chalmers and Hunter 1912 SC 126.

35 Style Financial Services Ltd v Bank of Scotland 1996 SLT 421; Bank of Scotland v Macleod Paxton Woolard & Co 1998 SLT 258; Macadam v Grandison [2008] CSOH 53.

36 N R Whitty, “The ‘No Profit from Another’s Fraud’ Rule and the ‘Knowing Receipt’ Muddle” 2013 Edin LR 37-62.

37 2010 SC 156.

38 New Mining (n 34).

39 The giving of valuable consideration is no defence if the third party is in bad faith: Clydesdale Banking Co v Paul (n 34) and Bank of Scotland v Macleod Paxton Woolard (n 35).

40 G L Gretton, “Constructive Trusts” 1997 Edin LR 281-316 and 408-19.

41 1994 SLT 682.

42 [1893] 2 QB 390.

43 (1886) 14 R 266, Lord Kinnear at 270; (1886) 15 R (HL) 45, Lord Watson at 48.

44 1907 SC 445.

45 Sharp (n 2) at 480H-481B.

46 Professor George Gretton (n 40) argued for the abolition of the constructive trust but did not dispute its existence.

47 (1872) 11 M 33. See also Blyth v Maberley’s Assignees (1832) 10 S 796.

48 (1902) 4 F 739.

49 Colquhoun ’s Trustee (n 48) at 742.

50 (1904) 6 F 1028.

51 1959 SLT 71.

52 He referred to Bell, Comm I, 286 (in which Bell relied on English authorities for the principle that where a factor, who was entrusted with his principal’s funds for investment, misapplied them, the produce of his misapplication, if distinguishable, remained the principal’s), Macadam (n 47) and Jopp (n 50).

53 1991 SLT 83. Dr Parker Hood commented on the case in 1994 SLT (News) 265-68.

54 Gretton (n 40) 296-97.

55 Unreported, 2 August 1991; summarised 1991 GWD 30-1772.

56 2014 SC 579.

57 Ted Jacob Engineering (n 56) at para 99.

58 Lord Neuberger, “The Remedial Constructive Trust – Fact or Fiction,” The Banking Services and Finance Law Association Conference, Queenstown, New Zealand, 10 August 2014.

59 If a remedial constructive trust were not to protect against a defender’s insolvency, it would add nothing to a restitutionary claim based on either the principle of no profit from fraud or breach of fiduciary duty or unjustified enrichment.

60 1996 SLT 851.

61 See also NZ Netherlands Society “Oranje” Inc v Keys [1973] 1 WLR 1126, Lord Wilberforce at 1130-31 and Walker v Corboy (1990) 19 NSWLR 382 which were discussed in Style (n 60).

62 1989 SLT 718.

63 This would apply event where the principal could not benefit from the opportunity (n 20).

64 The battle lines appear to be between equity lawyers on the one hand and restitution and commercial lawyers on the other.

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