#10036 - Proprietary Restitution - Restitution of Unjust Enrichment

PROPRIETARY RESTITUTION

INTRO

1. Lloyds Bank v Independent Insurance – suggested that there is a 5^th question to be asked after the 4 in Battersea: what remedy

2. Personal rights to restitution are realized by personal remedies ie. they follow a person

3. Proprietary rights to restitution are effected by proprietary remedies (ie. they follow property)

4. KEY QUESTION: when should restitution for UE be proprietary rather than personal

WHAT ARE THE ADVANTAGES OF PROPRIETARY RESTITUTION

1. It potentially avoids direct providers rule, so C can still have a claim for UE

2. Gives C priority on the property where D goes insolvent, so the property is not available for distribution amongst D’s general creditors

GENERAL VIEWS

1. Burrows – Right to proprietary rest is a new right created in response to UE. It’s not about protecting pre-existing proprietary rights.

2. Virgo – Tracing cases rely on reasoning of ‘That property remains mine and I want it back’ (Burrows quote). So Virgo argues that UE only triggers personal restitution. The reason why C can claim property is because it’s about vindication of proprietary rights in substitute property and not with UE – which Burrows says relies on the fiction of persistence

FOSKETT v McKEOWN (HL)

• whilst not mentioning Virgo, the House of Lords agreed with his stance.

• Lord Millett – leading speech (great quote): ‘The transmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not of the law of unjust enrichment … The claimant succeeds if at all by virtue of his own title, not to reverse unjust enrichment …’

• This is a real problem with Burrows’ analysis as no matter what he says, this case says otherwise. But he says this case ‘cannot, and must not, be regarded as the last word’ on the matter

BURROWS and VIRGO EXAMPLE

1. In an unauthorized substitution case, according to Burrows, if C can show that his property (ie. a pig) has been substituted to a horse and then to a car because holder of the car has been unjustly enriched at C’s expense NEW proprietary rights are created in the car to ‘correct’ the injustice of C losing the pig. Whereas Virgo says that C has the SAME proprietary rights in the car because he owned the pig

BURROWS’ EXAMPLES OF PROPRIETARY RESTITUTION REVERSING UE:

1. Burrows says there are a number of examples and it’s the best explanation of equitable proprietary rights after tracing:

1. Chase Manhattan Bank – the trust imposed on the mistaken payment

2. Cooper v Phibbs – equitable liens imposed over mistakenly improved land

3. Neste Oy – the trust imposed in this case, in respect of the payment received by the defendant after its resolution to cease trading so that, at the time of receipt, there was bound to be a failure of consideration

4. Car and Universal Finance – rescission of an executed contract, for misrepresentation or duress or undue influence. When exercised, rescission at law straightaway revests the legal title to goods or land transferred under the contract

WHEN DOES PROPRIETARY RESTITUTION OCCUR

1. NEED IDENTIFIABLE PROPERTY

1. Burrows - Can only have proprietary restitution where there is identifiable property to which the right can be attached

2. NOT ANYTIME PERSONAL RESTITUTION APPLIES

1. Burrows –one view is that proprietary restitution should exist whenever personal restitution does. That whenever the claimant wants it, it should be allowed, because it achieves restitution more precisely because it doesn’t require any valuation BUT

2. Burrows says this isn’t the case, as if a debtor fails to repay a loan to its creditor, the creditor is not entitled to proprietary restitution for failure of consideration even if the debtor retains the loaned money (or its traceable substitute). To grant proprietary restitution ‘at a stroke, would destroy the established law on insolvency’ as it’d turn most unsecured creditors into secured creditors

3. CONDITIONS FOR WHEN PROPRIETARY RESTITUTION IS AVAILABLE

1. no period of unrestricted beneficial ownership

1. Birks and Chambers - Dividing line between unjust factors which do and do not trigger UE are whether there is a period of time where D has unrestricted beneficial ownership of the enrichment. So, duress, mistake, ignorance and undue influence, there is an injustice at the point of transfer from C to D. So D never had the beneficial ownership. Whereas, failure of consideration, this beneficial ownership came later

2. C hasn’t taken the risk of insolvency

1. Providing proprietary restitution will give C priority on D’s insolvency, SO Burrows suggests this should not be allowed where it will undermine the present law on insolvency. One way of determining this is to ask whether C has taken the risk of insolvency (Lord Goff asked this in Westdeutsche v Islington)

2. Burrows suggests that this ‘test’ needs fleshing out

Fleshing Out Above Test

1. Burrows is essentially asking whether C is, or is analogous to, a secured creditor. With failure of consideration, he’s not. He made the payment or conferral of benefit under the contract and it is only later (when D fails to reciprocate his obligations under the contract) that C is entitled to restitution. Thus, up until this point C took the risk that D might not provide the consideration. To allow restitution would essentially give C priority on insolvency ‘by the back door’ WHEREAS

2. Where the unjust factor relates to an impairment of consent (ie. duress, mistake, undue influence) or no consent (ie. ignorance) then C will normally be analogous to a secured creditor, because he never intended D to be enriched at all THUS

3. GENERAL RULE:

1. failure of consideration = C took the risk

2. impaired consent, no consent unjust factors = C didn’t take the risk to analogous to a secured creditor

4. HOWEVER, Burrows suggests a circumstance where even where mistake is the unjust factor, C took the risk. So, for example where C made a payment under contract due to a mistake of law, believing the contract was valid where it was void. It is arguable that C still the risk here, as he knew there was a chance D would become insolvent at some point.

5. Swadling – rejects the argument suggesting it relies on a misunderstanding of what is meant by priority. But Burrows says Swadling’s narrow use of the term priority is not supported by case law. No case suggests it’s not a phrase solely for use as between unsecured creditors and thus, it is perfectly natural to describe a secured creditor as having priority on insolvency.

6. FINALLY – Burrows is alive to the fear of the ‘risk of insolvency’ approach could lead to the courts having too much discretion. Restitution of UE should be a response whenever the elements are satisfied, not up to courts discretion so this approach needs certainty (widening scope of restitution renders receipts of benefits less secure)

Lord Browne-Wilkinson’s Suggested Approaches: Conscience and Remedial Discretion

1. Westdeutsche v Islington – Lord B-W suggested two approaches to proprietary rest in leading speech (Burrows disapproves of both):

1. a trust should be imposed where D’s conscience is affected, which is an underlying principle of all trusts

1. Burrows says this is wrong because:

• it’s unacceptably uncertain AND

• an express trustee is a trustee from the moment property is transferred into his name irrespective of his own knowledge or conscience

2. English law of restitution could be developed by embracing the notion of remedial constructive trust

1. It wasn’t exactly clear what was meant by this.

2. Professor Austin Scott – has highlighted how in America constructive trusts are viewed as a remedy in the USA in response to UE, perhaps Lord B-W was suggesting something similar (whether knowingly or not) BUT

3. Burrows – he thinks Lord B-W was suggesting that proprietary restitution should be applied in accordance with judge’s discretion BUT this would undermine the necessary certainty required in UE. AND IN ANY EVENT

4. Re Polly Peck – CA gave Lord B-W’s suggestion a ‘frosty reception’ in this case (according to Burrows) with Nourse LJ being critical of the discretion this remedial constructive trust would deliver

CANADIAN APPROACH

1. LAC Minerals – this was a case concerning restitution for wrongs where the difficulty in assessing the quantum of personal restitution influenced the decision to impose a constructive trust over property.

2. Burrows – ‘It is hard to accept that this is a good justification for imposing proprietary rather than personal restitution’

OBJECTIONS TO UNJUST ENRICHMENT ANALYSIS OF PROPRIETARY RESTITUTION

LORD MILLETT’S OBJECTION (writing extra-judicially)

1. IT’S PROPERTY LAW

1. He says that ‘Why bring unjust enrichment into it? It is the law of property which deals with the creation, acquisition, disposal and transmission of property rights’ BUT

2. Burrows - this assumes that UE and property law are mutually exclusive categories, which Birks called the ‘categorical error’. UE is a category of event within both the law of property and obligations.

2. WHY PROPERTY LAW HAS DECIDED THERE SHOULD BE A PROPRIETARY RIGHT IN A TRACEABLE ASSET

1. ‘It belongs to him because he owned the original thing’ BUT

2. Birks – this is the ‘fiction of persistence’

3. Burrows – says this quote makes sense only in that, if C owns a goat which is taken without consent, he has proprietary rights to the goat in the hands of the transferee (X). But if C goat’s is given without consent to D (an innocent person), who then acquires a cow in exchange for the goat, it is not readily explainable why C has proprietary rights in the cow. MILLETT EXPLAINS THIS BY:

3. THE LAW DEEMS UNAUTHORISED...