Havelock, Rohan --- "Judicial discretion in private law - a commentary" [2016] OtaLawRw 5; (2016) 14 Otago LR 285

Last Updated: 12 January 2018

^{Judicial Discretion in Private Law – a Commentary}

Rohan Havelock^*

Introduction

With reference to jurisprudence across the Commonwealth, Professor

^{Graham Virgo argues that ‘rule–based’ approaches to justice and}

^{‘discretionary’ approaches to justice need not be in stark opposition.1}

^{Instead, a reconciliation is possible. This involves the identification of}

^{rules which can be modified by the application of recognised principles}

^{in certain circumstances.2 Such modification imports a degree of judicial}

^discretion.

Views of the legitimate scope of discretion in judicial decision–making are necessarily informed by conceptions of the meaning, role and place of private law itself. For example, an instrumentalist conception of private law (as a means to achieve social, economic and other ends) will tend to license ‘strong’ discretion, and indeed judicial activism, so that, for example, there is no necessary correlation between a ‘right’ and a ‘remedy’ in respect of that right. On the other hand, a conception of private law as an end in itself (such as the conception of corrective justice)³ will tend to advocate ‘weak’ discretion so that, for example, there is a correlation between a ‘right’ and a ‘remedy’.

This brief commentary cannot hope to address these fundamental issues, or even all of the issues that Professor Virgo raises either directly or indirectly. Instead, it will focus on the examples with which Professor Virgo has illustrated his thesis: the illegality defence, and the constructive trust (remedial and institutional).⁴

^* BA LLB (Hons) LLM (Cantab), Senior Lecturer, University of Auckland and Barrister and Solicitor of the High Court of New Zealand. This commentary was presented at the “Law of Obligations: Issues in Restitution Symposium” held at the Faculty of Law, University of Otago on 5 August 2016. I am grateful to the Faculty for hosting this event, to the Law Foundation for its generous sponsorship, and to the participants for their comments.

^{1 G Virgo “Judicial Discretion in Private Law” at 258 and 283–284.}

^{2 At 260.}

^{3 EJ Weinrib The Idea of Private Law (Oxford University Press, Oxford, 2012)}

^56.

^{4 Although beyond the scope of Virgo’s paper, another area where}

^{discretionary reasoning has crept in at the highest level is unjust}

^{enrichment. In Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66, [2016]}

^{AC 176, Lord Neuberger, President, introduced elements of discretion}

^{both in relation to the identification of an unjust factor (at [77]), and in}

^{relation to quantifying the enrichment (at [81]). It is difficult to reconcile}

^{this with the strict liability of unjust enrichment.}

^{The dangers of a strongly ‘discretionary’ approach}

The so–called ‘discretionary’ approach which Professor Virgo has described – as exemplified by the judgment of Lord Walker in Pitt v Holt⁵

– is necessarily facilitated by the adoption of indeterminate notions (such as ‘unjust’ and ‘unconscionable’) which are not restricted or limited by defined rules or principles.

In this open-ended form, these notions not only license strong judicial discretion kept fresh for each application to the facts,⁶ but they tend to foment a lack of stability and rigour in decision–making. Whether conduct is ‘unjust’ or ‘unconscionable’ is fundamentally a matter of impression for the individual judge evaluating the facts. The late Peter Birks was deeply critical of such terminology: “Like ‘fair ’ or ‘just’, the word ‘unconscionable’ is so unspecific that it simply conceals a private and intuitive evaluation.”⁷

Because the notions are indeterminate and unrestrained by rules and principles, there is greater scope for different judges to reach different conclusions.⁸ The likely result is that like cases are not treated alike.⁹

^{The law loses its uniformity and predictability. Such a breed of}

^{‘discretionary’ approach is to be rejected.}

Illegality

Because the illegality defence is an instrument of public policy (and indeed public morality),¹⁰ the natural preference may be for a discretionary approach which involves judicial evaluation of a range of public policy factors in the particular case.¹¹ This was the approach adopted by Lord Toulson (speaking for the majority) in the seminal judgment of the Supreme Court in Patel v Mirza.¹² Heeding criticisms of

⁵ Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108 at [124]–[128] per Lord Walker.

^{6 See also J Edelman “Judicial Discretion in Australia” (2000) 19 Aust Bar}

^{Rev 285, referring to “pure” or “absolute” discretion (meaning the court}

^{decides upon a course of action unguided by rule or principle and solely}

^{as a matter of subjective determination).}

^{7 P Birks “Equity in the Modern Law: An Exercise in Taxonomy” (1996) 26}

^{UWAL Rev 1 at 16–17.}

^{8 As Kirby P (as he then was) observed in PS Chellaram & Co Ltd v China}

^{Ocean Shipping Co [1991] 1 Lloyd’s Rep 493 (NSWSC CA) at 512, “The}

^{reaction to the same facts will necessarily differ from one Judge to}

^{another”. The truth of this is reflected in the judgments in Louth v Diprose}

^{[1992] HCA 61; (1992) 175 CLR 621.}

^{9 See P Birks “Three Kinds of Objection to Discretionary Remedialism”}

^{[2000] UWALawRw 1; (2000) 29 UWAL Rev 1 at 15–16.}

^{10 Bakewell Management Ltd v Brandwood [2004] UKHL 14, [2004] 2 AC 519}

^{at [60].}

^{11 As Lord Neuberger put it in Patel v Mirza [2016] UKSC 42, [2016] 3 WLR}

^{399 at [161], “Indeed, the very fact that the approach of the courts in cases}

^{on this topic is based on policy suggests that strict immutable rules are}

^{inappropriate.”}

^{12 Patel v Mirza [2016] UKSC 42, [2016] 3 WLR 399.}

a “rule–based” approach to illegality,¹³ his Lordship instead adopted a discretionary approach based on a “trio of necessary considerations” by which illegality is to be determined.¹⁴ This included whether it would be “disproportionate” to deny relief, in relation to which his Lordship refused “to lay down a prescriptive or definitive list” of relevant factors.¹⁵

By contrast, the more formalistic approach of the minority was to recognise a default rule of restitution in the case of illegality,¹⁶ to which there are exceptions in defined circumstances where the parties are in pari delicto in relation to the illegal act.¹⁷ The rationale for a default rule was that restoration of the status quo prior to the illegal transaction was “unobjectionable”.¹⁸ This was said to be provide much needed clarity and certainty on the topic.¹⁹

It is submitted that, even in the context of illegality, an approach which involves the discretionary evaluation of a range of factors is inappropriate. First, the relative significance and weight of the “trio of considerations” is not at all clear, and some of the more specific factors relevant to these considerations are not even known in advance. Secondly, by their nature these factors can be weighed up differently by different judges, even on the same facts.²⁰ These criticisms do not imply that there must be a single and rigid rule applied to all cases. But they do imply that the adoption of a single rule that is qualified by defined exceptions according with principle is probably more workable, transparent and conducive to like cases being treated alike.

¹³ In particular, AS Burrows Restatement of the English Law of Contract (Oxford

^{University Press, Oxford, 2016) at 221–222.}

^{14 Patel v Mirza, above n 12, at [101]–[109].}

^{15 At [107].}

^{16 This is similar to the effect of s 6 of the Illegal Contracts Act 1970 in New}

^{Zealand. This provides that “every illegal contract shall be of no effect}

^{and no person shall become entitled to any property under a disposition}

^{made by or pursuant to any such contract”. This may be regarded as}

^{amounting to a default rule of automatic restoration of the status quo ante}

^{(and restitution of any benefits), although s 7 gives the court a discretion}

^{to grant “such relief by way of restitution, compensation, variation of the}

^{contract, validation of the contract in whole or part or for any particular}

^{purpose, or otherwise howsoever as the court in its discretion thinks just”.}

^{17 Patel v Mirza, above n 12, at [197]–[199] and [202]–[203] per Lord Mance,}

^{at [211], [214] and [217] per Lord Clarke, and at [241]–[244] and [250] per}

^{Lord Sumption. Although Lord Neuberger also adopted a default “rule”}

^{at [146], somewhat confusingly, at the end of his judgment (at [174]–[186])}

^{he agreed with the “trio of considerations” framework.}

^{18 At [197], [199] and [202] per Lord Mance; at [211] per Lord Clarke; and}

^{at [250] per Lord Sumption.}

^{19 At [157] per Lord Neuberger.}

^{20 See [263] per Lord Sumption.}

^{The Remedial Constructive Trust}

Needless to say, the remedial constructive trust (“RCT”) is a controversial remedy.²¹ It is a trust which is created over property by order of the court retrospectively, where there was none before. In cases where third party interests are involved (such as where creditors have claims on the property), it will necessarily have prejudicial effects. These are all the more pronounced in insolvency situations, and one of the strongest criticisms of the remedy is that it interferes with the statutory insolvency regime.²²

^{Professor Virgo cites instances of “principled reasoning” in the context}

^{of the RCT.23 For example, in Muschinski v Dodds, Deane J stated:24}

The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate process of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles.

This is reassuring, but falls short of giving any indication of what those “principles” referred to are. Until these principles are articulated and the scope of their application defined, the RCT remains a potential “medium for the indulgence of idiosyncratic notions of fairness and justice”.

Professor Virgo goes on to say that in New Zealand “the principled approach” to the operation of the RCT is most apparent,²⁵ referring to the judgment of Glazebrook J in Commonwealth Reserves I v Chodar.²⁶

In that case, her Honour imposed an RCT over the relevant assets (a yacht and residential property in New Zealand purchased with money invested by the plaintiffs). Before doing so, her Honour was concerned that there should be a “principled basis” for the RCT and referred to two “potential triggers”: unjust enrichment and unconscionability.²⁷

^{In relation to the latter, her Honour observed that “[t]he constructive trust}

²¹ See generally DWM Waters The Constructive Trust: The Case for a New Approach in English Law (Athlone Press, London, 1964) and DWM Waters “The Nature of the Remedial Constructive Trust” in P Birks (ed) The Frontiers of Liability (Oxford University Press, Oxford, 1994) 165 at 167–176.

²² As Mummery LJ remarked in Re Polly Peck (No 2) [1998] EWCA Civ 789; [1998] 3 All ER 812 (CA) at 827, “The insolvency road is blocked off to remedial constructive trusts, at least when judge driven in a vehicle of discretion.” See also P Birks “Three Kinds of Objection to Discretionary Remedialism”, above n 9, at 12.

^{23 G Virgo, above n 1, at 271–272.}

^{24 Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 at 615. See also State Trustees Ltd}

^{v Edwards [2014] VSC 392 at [143] and K Hayne “Letting Justice be Done}

^{without the Heavens Falling” [2001] MonashULawRw 2; (2002) 27 Mon LR 12 at 16.}

^{25 G Virgo, above n 1, at 271.}

^{26 Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 (HC). On the facts,}

^{concern as to the interests of third party creditors did not arise.}

^{27 At [42].}

is often characterised as ‘the formula through which the conscience of equity finds expression’”.²⁸ Several factors were posited as relevant to the question of whether proprietary relief can be justified: the reasons why other forms of relief are inadequate, the interests of any third parties, and the other circumstances of the case.²⁹

It is submitted that this does not represent a “principled approach” to the RCT, even assuming the concept itself is justified. First, the terms used to describe the basis of this trust – “unconscionability” and “the conscience of equity” – raise the problem of indeterminacy already referred to. These terms may signal that we are dealing with equitable liabilities (in general), but are merely conclusory labels which tend to blinker the Court into assessing the morality of conduct.³⁰ Indeed, in Chodar, it appears that the main reason for the imposition of an RCT was the obstructive and dilatory behaviour of the defendants.³¹

Secondly, although the Court posited several factors relevant to the imposition of an RCT, the relative importance and application of these factors was not addressed. Presumably, these are matters for the individual judge in the particular case. Thus, instead of applying a settled rule or principle to the facts, the court is to weigh up the factors and make an overall assessment. This imports strong discretion, and with it the potential for arbitrary and unpredictable decision making.

Finally, the Court did not provide a convincing normative justification for the creation of a new proprietary right in favour of the plaintiffs. On the facts, the source of that right was not any pre–existing trust or fiduciary relationship between the plaintiffs and defendants, as the Court indeed held.³² Instead, the relationship with the first and second defendants was a contractual one, consisting of personal obligations (notwithstanding that the contract was fraudulent). In the circumstances, it is difficult to see any justification for the judicial creation of property rights or property–like rights.

The (Modified) Institutional Constructive trust

Unlike the judicially imposed RCT, the institutional constructive trust (“ICT”) is one which the court merely recognises as existing, in a declaratory way.³³ Professor Virgo argues that the time is nigh to recognise

²⁸ At [44].

^{29 At [47]–[48]. The concern as to third party interests was also acknowledged}

^{by Tipping J in Regal Castings v Lightbody [2008] NZSC 87, [2009] 2 NZLR}

^{433 at [163], in the context of a RCT imposed in the context of a claim of}

^{alienation of property with intent to defraud creditors under s 60 of the}

^{Property Law Act 1952.}

^{30 See further RA Havelock “Conscience and Unconscionability in Modern}

^{Equity” (2015) 9 J of Eq 1 at 9.}

^{31 Chodar, above n 26, at [60].}

^{32 At [51].}

^{33 Fortex Group Ltd (in rec and liq) v MacIntosh [1998] NZCA 322; [1998] 3 NZLR 171 (CA) at}

^{172–173 per Tipping J.}

there is only “one form” of constructive trust: an ICT which can be modified (“MICT”).³⁴ The ability to modify imports judicial discretion, but such modification is said to be governed by recognised principle rather than arbitrary choice.

It is submitted that there are several reasons to be sceptical about the recognition of such an additional trust. First, insofar as it is intended to respond to “unconscionability”, it appears insufficiently principled. Secondly, it does not necessarily cohere with established equitable doctrine and policies, for reasons below. Thirdly, and related to the last point, where existing equitable property rights are concerned, it is doubtful whether there is any room for discretionary modification, whether “principled” or not.

“Unconscionability” as the basis of the ICT and MICT

Professor Virgo says that the most important principle underpinning the constructive trust is “unconscionability”, which is fault–based (with the knowledge of the defendant playing a central role).³⁵ In light of this, Professor Virgo argues that “subjective fault” should be the standard for recognition of the constructive trust, since “a defendant who can be considered to have acted unconscionably should be deprived of all benefits arising from their unconscionable conduct”.³⁶

The term ‘unconscionability’ broadly means ‘not controlled by conscience’³⁷ and is therefore often associated with ‘conscience’ as the hallmark notion underlying the Equity jurisdiction. ‘Conscience’ itself is a notion that is undeniably steeped in complexity and even mystery. It has several possible senses.³⁸ For example, it may refer to the guiding

^{‘conscience’ of the judge or court, to the individual ‘conscience’ of one or}

^{other of the parties, or sometimes to an objective standard of judgment.}

Although references to ‘unconscionability’ as the basis of the ICT can be found in modern case law,³⁹ there are two fundamental problems with this. The first is the doubtful historical legitimacy of such language. In the old Chancery reports, there are scarcely any references to

‘unconscionable’ or ‘unconscionability’ as the basis of reasoning.⁴⁰ Thus, out of 31,338 Chancery cases in total for the years 1220–1873, there are only 44 references to the term ‘unconscionable’ and less than one third

³⁴ Virgo, above n 1, at 274.

^{35 At 273–274 and 282–283.}

^{36 At 274.}

^{37 Oxford English Dictionary (3rd ed, Oxford University Press, Oxford, June}

^{2014) available at: <www.oed.com>.}

^{38 See further DR Klinck “The Unexamined ‘Conscience’ of Contemporary}

^{Canadian Equity” (2001) 46(3) McGill LJ 571 at 575 and 587–610.}

^{39 Westdeutsche Landesbank Girozentrale v Islington London Borough Council}

^{[1996] UKHL 12; [1996] AC 669 (HL) at 705 per Lord Browne–Wilkinson and Paragon Finance}

^{plc v DB Thakerar and Co [1998] EWCA Civ 1249; [1999] 1 All ER 400 (CA) at 408 per Millett LJ.}

^{40 See RA Havelock, above n 30, at 12–15.}

of these are in a general or broader sense.⁴¹ The term is largely a modern judicial invention that has taken on an unwarranted significance of its own, almost as a mantra.

The second is that a focus on ‘unconscionability’ all too easily descends into a broad assessment of conduct and its punishment, on the basis of what offends the individual judge in moral terms. But this kind of decision–making is a regression to a bygone age, when the medieval Chancellors zealously applied conscience (in the sense of the moral law) in order to save parties from committing deadly sin.⁴² With its systematisation, Equity moved well beyond this: the ecclesiastical notion of conscience was eventually superseded by rules and principles which gave effect to considerations of ‘conscience’.⁴³ The basis of the ICT can now be defined without appeal to the obfuscating language of

^{‘unconscionability’ or ‘fault’.44}

The Situations for Modification

The following section will address the situations in which Professor Virgo

^{suggests modification of the ICT may be appropriate.}

Benefits transferred to innocent volunteer recipients

At present, where property or its traceable substitute is transferred to a recipient who is a volunteer, Equity will not allow such a recipient to retain the property.⁴⁵ Nevertheless, Professor Virgo advocates a different outcome where such a volunteer is innocent, referring to three situations:⁴⁶

(a) Theft: where an asset is stolen and an innocent volunteer recipient subsequently obtains possession of the asset or its traceable

⁴¹ At 12–15.

^{42 See AWB Simpson A History of the Common Law of Contract (Clarendon}

^{Press, Oxford, 1975) at 398; F Metzger “The Last Phase of the Medieval}

^{Chancery” in A Harding (ed) Law-making and Law-makers in British}

^{History: Papers presented to the Edinburgh Legal History Conference, 1977}

^{(Royal Historical Society, London, 1980) 79 at 83; and Klinck, above n 38}

^{at 577–578.}

^{43 See also Tanwar Enterprises v Cauchi [2003] HCA 57, (2003) 217 CLR 315}

^{at [86].}

^{44 On one view, that basis is the deemed intention of the defendant to}

^{recognise a beneficial interest in favour of another which the defendant}

^{has denied: see J Palmer “Attempting Clarification of Constructive Trusts”}

^{(2010) 24 NZULR 113 at 129.}

^{45 Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102 (HL) at 132 per Lord Millett: “On}

^{ordinary principles [volunteers who derive title under the wrongdoer}

^{otherwise than for value] are in no better position than the wrongdoer,}

^{and are liable to suffer the same subordination of their interests to those}

^{of the claimant as the wrongdoer would have been.” See also 127 per}

^{Lord Millett.}

^{46 Virgo, above n 1, at 275–282.}

substitute,⁴⁷ Professor Virgo contends that the recipient’s claim should “be treated as equally good, and possibly ... stronger than that of the victim of the theft”.⁴⁸

(b) Mistaken payment: where a payment is made under mistake and this is known to the defendant⁴⁹ and the property is transferred to an innocent volunteer recipient, Professor Virgo contends that there is “no reason” why the claimant should have a proprietary right against the recipient.⁵⁰

(c) Gains obtained in breach of fiduciary duty: where the defendant transfers such gains or their traceable proceeds to an innocent volunteer recipient, Professor Virgo contends that the principal and the recipient should “share the property equally”.⁵¹

In all three situations, the basic contention is that the innocence of the volunteer recipient should trump the plaintiff’s equitable proprietary rights in the relevant benefit(s). Leaving aside precedent to the contrary,⁵² such a conclusion seems problematic for at least two reasons.

First, the modification of the ICT in this way does not cohere with existing equitable doctrine. If the recipient has not provided value in exchange for the benefit, he or she is a mere volunteer. But one equitable maxim is that “Equity will not assist a volunteer”,⁵³ even if innocent. While the maxim may be no more than a “summary statement of a broad theme”⁵⁴ and its application may itself be discretionary (in the sense that the court does not have to apply it), if it is to be rejected where it has clear application, this should be for sound reason.

Further, even when a party is seeking to gift their own property, Equity

⁴⁷ This assumes, controversially, that the thief holds the assets on constructive trust for the victim: see Westdeutsche Landesbank Girozentrale v Islington London Borough Council, above n 39, at 716 per Lord Browne–Wilkinson, giving the example of a thief who steals a bag of coins.

^{48 Virgo, above n 1, at 276.}

^{49 This assumes, controversially, that if the defendant fails to repay, the}

^{property will be held on constructive trust: see Westdeutsche Landesbank}

^{Girozentrale v Islington London Borough Council, above n 39, at 715 per}

^{Lord Browne–Wilkinson, “Although the mere receipt of the moneys, in}

^{ignorance of the mistake, gives rise to no trust, the retention of the moneys}

^{after the recipient bank learned of the mistake may well have given rise}

^{to a constructive trust”.}

^{50 Virgo at, above n 1, at 277.}

^{51 At 282.}

^{52 For example, Kak Loui Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198–199;}

^{Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR}

^{296 at [510].}

^{53 Milroy v Lord [1862] EngR 951; (1862) 4 DE G F & J 264, 45 ER 1185 (Ch).}

^{54 See Corrin v Patton (1990) 169 CLR 540 at 557 per Mason CJ and McHugh J.}

will not perfect an imperfect gift in favour of the donee (volunteer).⁵⁵

^{Given this, it seems anomalous to suggest that a volunteer who receives}

^{the relevant benefit should acquire proprietary rights adverse to the}

^{plaintiff, when there is not even donative intent by the plaintiff.}

Secondly, in situation (c) and by implication also (a), the modification means that the principal’s equitable proprietary rights in the benefit are enforceable against the innocent volunteer only to the tune of a half-share. By contrast, equitable proprietary rights remain enforceable against other third parties (apart from the bona fide purchaser for value without notice) to the tune of the full value of the benefit. This makes equitable proprietary rights over benefits derived from a third party mere ‘second–rate’ rights because they are defeasible in the case of a recipient who is an innocent volunteer. This has at least two doctrinal implications. First, it renders the defence of bona fide purchaser for value without notice nugatory because the recipient need not be a purchaser for value. Secondly, it leads to a slippery slope: why not also make equitable property rights under an ordinary express trust partially defeasible in the case of the innocent volunteer?

Gains obtained in breach of fiduciary duty – priority in insolvency

Building on an obiter dictum of Lord Neuberger, President, in FHR European Ventures LLP v Cedar Capital Partners LLC,⁵⁶ Professor Virgo argues that in an insolvency context the ICT can be modified “to ensure that the relative positions of the principal and unsecured creditors are treated equally”.⁵⁷ On a theoretical level, he claims that where the defendant’s profit is derived from a third party (and especially where the principal has not suffered loss), requiring disgorgement is not justified by the correction of injustice as between the parties. Instead, disgorgement effects distributive justice by depriving the fiduciary of gain.⁵⁸ This, Professor Virgo argues, means there is no reason why the principal’s claim should rank above unsecured creditors, which paves the way for modification of the ICT.⁵⁹

The premise of this argument can be questioned. Gain–based remedies can be justified by the influential theory of corrective injustice as articulated by Ernest Weinrib.⁶⁰ Thus, according to Weinrib, the nature

⁵⁵ Milroy v Lord, above n 53. The rule has been relaxed incrementally: Re Rose [1952] Ch 499 (CA); Kennedy v Tickner [1949] NZGazLawRp 150; [1950] NZLR 62 (SC); Pennington v Waine [2002] EWCA Civ 227, [2002] WLR 2075; Shah v Shah [2010] EWCA Civ 1408, [2011] WTLR 519; and Curtis v Pulbrook [2011] EWHC 167 (Ch), [2011] 1 BCLC 638.

⁵⁶ FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250 at [43]: “... the point [ie prejudice to unsecured creditors by reduction of the pool of assets] has considerable force in some contexts”.

^{57 Virgo, above n 1, at 280.}

^{58 At 280.}

^{59 At 280–281.}

^{60 EJ Weinrib “Restitutionary Damages as Corrective Justice” (2000) 1 Theo}

^{Inq L 1 at 12–18.}

of the fiduciary relationship itself justifies a gain–based remedy:⁶¹

The violation of a fiduciary duty is the paradigmatic example of the situation in which a gain-based remedy can emerge from the objective nature of the relationship ... a relationship such as that between fiduciary and beneficiary, the legal structure of which makes one person’s interests entirely subject to another ’s discretion, must have as one of its incidents the duty of loyalty owed by the latter to the former. The fiduciary’s duty of loyalty then becomes for purposes of this relationship an entitlement of the beneficiary.

Unauthorised gains made by the fiduciary are, therefore, an embodiment of breach of this fiduciary duty.⁶² On the basis of the reasoning in FHR European Ventures,⁶³ the same applies to the proceeds of a bribe or secret commission from a third party.⁶⁴ Indeed, such proceeds are property which should not be in the defendant’s estate at all.⁶⁵

The recognition of an institutional constructive trust over the proceeds of a bribe or secret commission⁶⁶ – being essentially the price paid for the fiduciary to act disloyally – is a logical and principled way to vindicate the entitlement of the beneficiary to the loyalty of the fiduciary.⁶⁷ On this basis, there is no sound justification for redistributing the gain to third party unsecured creditors who lack this entitlement (and in many cases will have assumed commercial risks as unsecured creditors), however deserving those persons may be in ‘moral’ terms.⁶⁸ Such redistribution would also obviously lessen the strict and proscriptive nature of fiduciary duties which restrict the personal autonomy of the fiduciary.⁶⁹

Conclusion: the MICT and Equitable Proprietary Rights

Professor Virgo denies that his proposed model of constructive trust is

^{‘remedial’ in the sense that a judge creates proprietary rights through}

⁶¹ At 33.

^{62 In support, Weinrib cites Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46 (HL) at 107 and}

^{115 in which the opportunity to profit from knowledge and information}

^{obtained while acting for the family trust was regarded as the property}

^{of the trust.}

^{63 FHR European Ventures, above n 56.}

^{64 At [46].}

^{65 At [43].}

^{66 These may be conceptually different (a bribe is paid for an agent to}

^{act disloyally, whereas a secret commission is typically a rebate on the}

^{purchase price or a supplement to sale price) but FHR European Ventures,}

^{above n 56, does not treat them differently. In both cases, the payments}

^{are the price of disloyalty.}

^{67 See P Millett “Bribes and Secret Commissions” [1993] RLR 7 at 23: “...}

^{a deemed agency gain or a bribe which is received by the fiduciary in}

^{kind ought in principle to be treated as trust property held in trust for}

^{the principal”.}

^{68 Admittedly, the case for redistribution may be stronger where the creditors}

^{are involuntary, such as the victims of torts.}

^{69 See generally S Worthington Equity (2nd ed, Oxford University Press,}

^{Oxford, 2006) 117 at 131–134.}

discretion.⁷⁰ While the discretion might be a restrained one, it is hard to escape the conclusion that the judge is ultimately modifying the existing proprietary rights of a plaintiff in order to grant the recipient rights to the property that he or she did not have before.⁷¹ The MICT is redistributive, and not merely corrective of injustice as between the parties.

It is doubtful whether there is any room for discretionary modification (principled or not) where equitable proprietary rights, or proprietary–like rights (arising out of a fiduciary relationship), are concerned.⁷² Such fixed rights demand regulation by hard–edged legal rules and principles if they are to be effectively protected and enforced.⁷³ As Lord Browne–Wilkinson observed in Foskett v McKeown:⁷⁴

The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary.

Both ‘principled’ and ‘non–principled’ forms of discretion alike modify existent equitable proprietary rights. Such rights then become not matters of entitlement but of defeasible expectation. Thus, even in the relatively specific situations which Professor Virgo has addressed, it is submitted that modifying the ICT amounts to modifying the very concept of equitable ownership.

⁷⁰ Virgo, above n 1, at 283.

^{71 As Nourse LJ remarked in Re Polly Peck (No 2), above n 22, at 831, “You}

^{cannot grant a proprietary right to A, who has not had one beforehand,}

^{without taking some proprietary right away from B”.}

^{72 For example, in Goodright v Wright [1717] EngR 15; (1717) 1 P WMS 397 at 399, 24 ER}

^{442 (Ch) at 443, Lord Parker CJ warned “that the altering settled rules}

^{concerning property, is the most dangerous way of removing landmarks”.}

^{See also Earl of Feversham v Watson [1678] 2 Nottingham’s Chancery Cases}

^{823, 79 Selden Society 637 at 639 per Lord Nottingham: “For if conscience}

^{be not dispensed by the rules of science, it were better for the subject there}

^{were no Chancery at all than that men’s estates should depend upon the}

^{pleasure of a Court which took upon itself to be purely arbitrary”.}

^{73 CM Rose “Crystals and Mud in Property Law” (1988) 40(3) StanL Rev 577}

^{at 580–590, distinguishing between ‘crystal’ rules and ‘mud’ standards}

^{in property law.}

^{74 Foskett v McKeown, above n 45, at 109. See also Lord Neuberger “The}

^{Remedial Constructive Trust – Fact or Fiction” (paper presented to}

^{Banking Services and Finance Law Association Conference, Queenstown,}

^{10 August 2014) at [26]–[27]. This paper is available at: <www.}

^{supremecourt.uk/docs/speech-140810.pdf>.}