#5291 - Defective Transfers - Personal Property Law

Defective Transfers

Where there is a defect in the transaction underlying a transfer of title the basic principle is one of abstraction.

Principle of abstraction

The validity of the transfer of title does not depend on the validity of any underlying transaction or contract. There is not a causal system whereby the underlying transaction must be valid for the transfer of title to be effective.

There is an exception in the sale of goods context where the Sale of Goods Act 1979 s.18 Rule 1 has the effect of making title pass purely based on the validity of the contract. In that situation it is essential for the underlying contract to be valid without delivery.

In all other situations the validity of the transfer is dependent on the effectiveness of the intent by which the transferor transfers to the transferee. There must have been an act of delivery and an intention to pass ownership. If these criteria are satisfied then it will not matter if the underlying contract is void or unenforceable.

An intention to pass legal title coupled with delivery is sufficient to pass legal title to goods regardless of the validity of the underlying contract (Belvoir Finance)

Abstraction and transfers of money

Transfers of money are generally governed purely by the principle of abstraction in an unmodified form. Title to money can only be passed by delivery with intention to transfer title.

The invalidity of the underlying contract has no effect on the derivative transfer of title to money (Westdeutsche)

Aside from the principle of abstraction, receipt of money which was then mixed with the recipients money would mean that legal title has passed anyway (Westdeutsche)

It may not matter whether the transfer is effective, even if the recipient is solvent then they will be liable to repay the amount on the basis of unjust enrichment due to a total failure of consideration.

Abstraction and incorporeal money

Even if the underlying transaction is void, it is still possible to have a valid transfer of incorporeal money. It will not affect the title which is received when the balance is erroneously credited to his account as, provided the credit is complete and irrevocable, the recipient will have primary legal title to that money.

So long as the original bank is unaware of the defect in the underlying transaction then the mandate is valid and this means the original bank can transfer money to the recipient bank and also debit the balance of the original account (Adamson v. Jarvis)

Adamson v. Jarvis means that the bank is able to indemnify itself even if the underlying transaction is void provided that it was not aware that the transaction was void.

Vitiation of intention is one of the fundamental aspects of the transfer

Because a derivative transfer of title depends on intention, if the intention is defective then there will not be an effective intent to pass title and so ownership will be retained.

There are various factors which could mean that there is not a fully formed intention to pass title:

1. Outright theft

Where property is stolen then there is no intent at all so the transfer will be ineffective and ownership will remain with the victim both in law and in equity

2. Fundamental mistake as to recipient’s identity

To be a fundamental mistake there must be a belief that the recipient is entirely different (Cundy v. Lindsay)

In face to face dealings the intention is to deal with the person in front of them (Phillips v. Brooks)

Where there are not face to face dealings then the presumption is that the intention was to deal with the party named in the contract (Shogun Finance)

3. Fundamental mistake as to the identity of the asset transferred

Where an asset is transferred believing it to be a different asset, e.g. a sovereign instead of a shilling (Ashwell)

Fox disagrees with Ashwell, he believes that a coin is a medium of exchange and this is what was intended to be transferred. Today, as all money is merely token, essential identity arguments in relation to money cannot succeed in Fox’s view.

4. Fundamental mistake as to the nature of the transaction

A mistake as to the fundamental nature of the contractual nature of the transaction can be a fundamental mistake (Bell v. Lever Bros)

Fox asserts that this reasoning cannot apply to a payment contract, the intention is to pass title to the money regardless of the underlying contract.

The invalidity of an underlying transaction does not invalidate the transfer of title (Belvoir Finance)

5. The amount of the asset (quantity)

If the transferor does not intend to transfer the same quantity as they in fact transfer then there is no intention to pass title in relation to the excess.

Handing over more money than had believed were handing over, there is no intention to hand over the excess so ownership retained as that is a fundamental mistake (Ilich)

But if an amount is paid thinking that one owes more than is actually true then there is no fundamental mistake as it was intended to transfer the greater amount. The mistake only goes to whether the money is due or not.

Fundamental mistake and incorporeal money

The starting point is that so long as the credit to the recipient’s account is complete and irrevocable then the recipient has primary legal title to the money transferred.

The starting point for the transferor and the transferor’s bank is that any problems between the transferor and recipient are irrelevant as regards the validity of the mandate given to the transferor’s bank.

If the mandate is a complete nullity and the transferor did not give a valid mandate then the transferor can sue his bank for the money and have this recredited. The recipient can then be sued by the transferor’s bank for unjust enrichment.

In principle the transferor could trace the credit into the recipient’s account at law if the transferor’s account is debited, on the basis of unauthorised substitution.

In fundamental mistake the mistake merely operates between the transferor and recipient. It will not invalidate the mandate between the transferor and the transferor’s bank. Therefore the appropriate claim will be by the transferor against the recipient on the basis of unauthorised substitution.

This will then facilitate tracing into the recipient’s bank account following the rules in FC Jones v. Jones. However it is still not possible to trace at law through a mixture of money.

Grounds for recovery in the absence of fundamental mistake

Any time there is a payment made pursuant to a mistake which is not fundamental then an unjust enrichment claim will arise. This is a wholly personal claim and a wholly personal remedy, so will not have any priority in an insolvency.

Alternatively one could find an equitable proprietary claim based on a resulting or constructive trust.

If money is paid by mistake then it may be possible to ignore any need for fundamental mistake and just pursue an equitable proprietary claim (Chase Manhattan)

A mistaken payment, where the mistake was simply the amount due and so it was not a fundamental mistake that vitiated intention, could be pursued on the basis that the mistake meant the property was held on trust (Chase Manhattan)

Chambers argues that the type of trust recognised in Chase Manhattan was a presumptive resulting trust. Such a presumptive resulting trust arises whenever there is a transfer for no consideration. Chambers says that in the absence of consideration it is to be assumed that there was no intention to pass the beneficial interest and this is significant according to Chambers.

Chambers continues to explain that a resulting trust is only a presumption and may be rebutted by proof that there was such an intention. If the transfer was pursuant to a mistake then the presumption is not rebutted and so the resulting trust remains.

The consequence of Chambers’ analysis is that every time there is a mistake in payment which could generate a personal unjust enrichment claim there will be a parallel proprietary claim in equity by way of resulting trust.

In Westdeutsche, Lord Browne Wilkinson rejected the resulting trust analysis on the basis that the intention was definitely to pass beneficial ownership and the mistaken belief that the payment was pursuant to a debt obligation was proof of that intention.

A mistake creates a constructive trust which arises if the recipient is aware that they have been paid money by mistake. There is no trust unless the recipient is aware (Lord Browne Wilkinson in Westdeutsche).

If it were a resulting trust then the trust would arise automatically and immediately regardless of the recipient’s awareness.

When money is stolen then this will affect the conscience of the thief and so a constructive trust shall exist (Westdeutsche)

Objections to the constructive trust analysis are that it exists only to avoid the rule against legal tracing through a mixture of money. There have also been objections to the idea of allowing a thief to hold legal title, as must be required for him to hold on constructive trust.

Fox objects to the objections. He argues that the thief does have legal title of possession, just not the best legal title relative to the true owner. The thief, according to the constructive trust analysis, has merely got legal possession, but this must be returned to the victim at his request.

A person who obtains another’s property is deemed to have mere possession and an equitable order could be sought to recover possession (Somerset v. Cookson)

There is, to some degree, a tension between a desire to preserve the nominal value of money and a desire to...