A. Metropolitan Bank v Heiron

Before coming to Lister v Stubbs itself it is convenient to deal with the remarkable case of Metropolitan Bank v Heiron.Footnote ⁴⁵ In that case a company director received £250 from a debtor to the company as a bribe to induce him to use his influence to obtain favourable terms of compromise. The company delayed bringing proceedings, not merely until more than six years had passed since the defendant received the bribe, but until more than six years since it discovered what had happened. The defendant raised a limitation defence. The question was not whether the bribe was held on trust for the company but whether the company's claim was statute barred, and this depended on whether the trust was what was then called an “express” trust (or what we would today classify as a Class 1 constructive trust), when the claim would not be statute barred, or a class 2 constructive trust, when it would.

Equity has always given relief against fraud by making any one sufficiently implicated accountable in equity. In such a case equity applied the Statutes of Limitation by analogy. But the Court of Chancery had developed the rule that, in the absence of laches or acquiescence, an “express” trustee was accountable without limit of time.Footnote ⁴⁶ This was because the possession of an express trustee was never by virtue of any right of his own but was taken from the outset for and on behalf of the beneficiaries. His possession of the property was said to be “coloured from the first by the trust and confidence by means of which he obtained it”, and his subsequent appropriation of the property to his own use was a breach of that trust. His possession was treated as the possession of the beneficiaries, with the result that time did not run in his favour against them.Footnote ⁴⁷

Accordingly a claim against a party who, though not expressly appointed as trustee, was charged with liability for breach of an existing trust or relationship of trust and confidence was never barred by lapse of time. Where, however, in the words of Cotton L.J., the trustee (sic) received money not belonging to the cestui que trust but which the cestui que trust could claim on the ground that the receipt of it was a fraud on him, the statute would run from the time he became aware of the fraud. In both cases, therefore, the money was held in trust; but in the second case the claim could be statute barred.

Brett MR and Cotton L.J. held that the fiduciary did not hold the bribe on trust for the company until the Court created a trust of the bribe and vested it in him. In Reid Lord Templeman, with uncharacteristic moderation, described this as “puzzling”. In their first edition, Meagher, Gummow and LehaneFootnote ⁴⁸ were more robust, describing it as “an even more astounding proposition than the basic ruling in Lister”. It is plainly wrong. The Court has no jurisdiction to create a trust de novo of its own motion. Its role is limited to finding, on the evidence of the defendant's past conduct, that a trust had been created by his actions.

James L.J. placed the case in the second category. He analysed it as one of “concealed fraud”, with the result that the Limitation Acts applied. As Lord Templeman observed in Reid, none of the relevant authorities was cited, with the result that the court's attention was not directed to the cases which showed that the receipt of the bribe, far from being a fraud on the company, should be considered as being for its account. James L.J. treated the defendant as if he were a stranger who had fraudulently misappropriated the company's money instead of a fiduciary who was in a position to receive the bribe only by virtue of the trust and confidence which his principal had previously placed in him.

The case should have been placed in the first category to which the Limitation Acts did not apply. This appears clearly from the later but classic decision of the Court of AppealFootnote ⁴⁹ in Soar v Ashwell,Footnote ⁵⁰ where the defendant was the solicitor to the trustees of a will trust. The trust funds included a mortgage. When the mortgage money was repaid, it was received by the defendant with the authority of the trustees in his capacity as their solicitor. He accounted for some of the money he received to his clients but misappropriated the rest. When sued by the sole surviving trustee he pleaded a limitation defence. Lord Esher MR explained that there were two questions for decision. Was the defendant an “express” trustee within the meaning of that expression in the context of the limitation defence? and if so did his misappropriation of the money precede or follow his trusteeship?

The Court of Appeal held that he was not an express trustee of the will but only solicitor to the trustees. So far as the beneficiaries under the will were concerned, he was not a fiduciary but a stranger. He was, of course, guilty of misappropriating money which he knew was subject to the trusts of the will. But if that were all, while the misappropriation would at once of itself make him a trustee of the money for the beneficiaries, he would have a limitation defence. But he was an “express” trustee of the mortgage money, so that the lapse of time was no bar to the action, because he received the money in a fiduciary relation and as trustee for his clients, the trustees of the will. The judgments of Lord Esher and Bowen L.J. make it clear that the relevant trust was not the will trust but the trust created by his receipt of trust money with the authority of his clients, an authority which was given because of the trust and confidence they placed in him as their solicitor. That trust came into being when the defendant, being in a fiduciary relation to his clients, received the proceeds on their behalf; and this inevitably preceded his misappropriation of the money. A proper analysis would have produced a similar result in Metropolitan Bank v Heiron.

As it stands, the latter decision is plainly wrong. It simply cannot be right that the dishonest fiduciary who receives a bribe should be able to plead a limitation defence while the (relatively) honest fiduciary like the solicitor in Soar v Ashwell Footnote ⁵¹ who acts properly in receiving a payment on his principal's behalf and with his authority but afterwards fails to account to him cannot. There is no conceivable logic in distinguishing between a fiduciary who receives money in fact intended for his principal and one who is merely treated as doing so because of he received it in a fiduciary capacity. In both cases the trust is a Class 1 constructive trust; in neither is there be a limitation defence.

Although the reasoning in Metropolitan Bank v Heiron cannot be supported, it does not follow that the company's claim should have succeeded. The circumstances in which the bribe was received should have excluded the application of the statute; but justice did not require the court to distort the law in order to hold that the action was time barred. On the facts it could and probably should have resorted to the well-established equitable doctrine of laches.

B. Lister v Stubbs

In Lister v Stubbs Footnote ⁵² the Court of Appeal placed what the Federal Court of Australia has recently described as “an anomalous limitation on the reach of the constructive trust in English law”.Footnote ⁵³ The defendant was employed to buy materials for his employers. He received commissions from the suppliers, some of which he invested profitably in shares. His employers brought proceedings against him and made an interlocutory application for a freezing order against the shares. At that time such an order could only be obtained in support of a proprietary claim. The Court of Appeal dismissed the application because, it said, the defendant did not hold the commissions or their proceeds on trust for his employers but was merely their debtor.

There were only two reasoned judgments. Cotton L.J. relied on his own judgment in Metropolitan Bank v Heiron. Lindley L.J. cited no authority, but denied that the defendant had obtained the bribe as the plaintiff's agent, by which he presumably meant that the bribe was intended for the defendant personally so that its receipt was outside the scope of his agency. If this was his meaning it was a non sequitur. It is perfectly possible for a bribe to be intended by the payer to be for the recipient personally but to be received by him for the account of a third party. Indeed, this is the only basis on which the defendant can be made personally liable “as debtor”.

Lindley L.J. based his decision on what he considered to be the unacceptable consequences of the claimants' argument. One such consequence would be that they could compel the defendant to account to them, not only for the money he had received with interest, but for all the profits which he might have made by embarking in trade with it. Another was that the bribe would not form part of the insolvent estate if the fiduciary became bankrupt, a concern which others have shared.Footnote ⁵⁴ “Can that be right?” he asked rhetorically, saying that the consequence showed that that there was some flaw in the argument. “If”, he said, “by logical reasoning from the premises conclusions are arrived at which are opposed to good sense, it is necessary to go back and look again at the premises and see if they are sound”. He said that he was satisfied that they were unsound — the unsoundness consisting in “confounding ownership with obligation”, a remark which the Federal Court of Australia, with admirable restraint, has recently described as “curious”. The problem with this reasoning is that the firstFootnote ⁵⁵ of what Lindley L.J. considered to be the undesirable consequences of upholding the claimants' argument was in accordance with the policy of the law and had been (and was subsequently to be) not only accepted with equanimity but insisted upon by generations of eminent equity judges both in England and elsewhere.

In the core passage of his judgment Lindley L.J., having said that the fiduciary was bound to pay the money to his principal “the moment he received it”, held that the relationship between them was not that of trustee and beneficiary but debtor and creditor. He did not explain why the debt should differ from an ordinary debt in that, where no terms as to payment are agreed, it is payable immediately whereas other debts are payable on demand. But he not only failed to explain why the money is payable the moment it is received, he failed appreciate the consequences.Footnote ⁵⁶

The anomaly to which the Federal Court of Australia referred was the fact that a similar limitation has never been applied where the bribe is received in kind. Between 1875 and 1890 the Court of Appeal decided three such cases.Footnote ⁵⁷ In each case the claimant was a newly formed company which had issued shares as consideration for the acquisition of the principal asset of its intended business. In two of the cases the defendant was a director of the company; in the third he was the company secretary. In each case the defendant had been concerned in a fiduciary capacity either in the negotiations with the vendor or in the issue of the shares; and in each case the bribe was paid by the vendor and consisted of shares which he had received as part of the purchase consideration. In each case the Court of Appeal treated the defendant as holding the shares in trust for the company. These cases have never been doubted; yet had the vendor bribed the defendant with money which the defendant had then chosen to invest in the company's shares, he would (according to both Lister v Stubbs and Sinclair v Versailles) not have held those shares in trust for the company. The distinction is patently absurd.

If there were such an anomaly it would be indefensible. But the only anomaly is Lister v Stubbs itself, for there have been many cases in which a fiduciary who has received a bribe consisting of money has been found to hold it in trust for his principal. They include Fawcett v Whitehouse (1829),Footnote ⁵⁸ where the defendant received a bribe of £12,000; Sugden v Crossland (£75);Footnote ⁵⁹ and Furs v Tomkies (£5,000);Footnote ⁶⁰ but there are many others, including Reid itself.

C. Reid

In Reid the head of the anti-corruption unit in Hong Kong took bribes from persons whose conduct he was employed to investigate and invested the money in landed properties in New Zealand which appreciated in value. The Hong Kong Government brought proceedings in New Zealand claiming that the defendant held the properties in trust for it. The New Zealand Court of Appeal held that it was bound by Lister v Stubbs and dismissed the claim. The Privy Council unanimously allowed the Government's appeal and held that both principle and English authority showed that Lister v Stubbs was wrongly decided and should not be followed. Lord Templeman said that it was not consistent with the principles that a fiduciary must not be allowed to benefit from his own breach of duty, that he must account for a bribe as soon as he receives it, and that equity regards as done that which ought to be done. It followed that the bribe and its traceable proceeds were held on a constructive trust for the principal. The reference to the maxim “equity regards as done that which ought to be done” has been questioned, but it is only another way of saying that the obligation of the fiduciary to pay the bribe to his principal the moment he receives it is one which equity will enforce.

Reid was a decision of a very strong Board. Among those sitting with Lord Templeman were Lord Goff of Chieveley, the Senior Law Lord and co-author of The Law of Restitution and Sir Thomas Eichelbaum, Chief Justice of New Zealand. The decision gave English judges a problem. They recognised that Lister v Stubbs was binding on them but rightly preferred the analysis in Reid. So did all the major textbooks on Equity. As the years passed, Lister v Stubbs was increasingly questioned by English judges. In Daraydan v Solland Footnote ⁶¹ Lawrence Collins J. distinguished it but questioned whether it was still good law in England, and said that he would have followed the Privy Council's decision in Reid if the case before him had not been distinguishable from Lister v Stubbs.

D. Sinclair v Versailles

In Sinclair v Versailles the Court of Appeal adopted a new approach, which has the advantage of seemingly explaining the perceived disparity in the treatment of bribes received in money and those received in kind, but only by ignoring the effect of the fiduciary relationship itself and at the cost of creating other anomalies. It held that the principal is not entitled to a proprietary remedy

This (“the 2011 re-formulation”) ignores the fiduciary relationship altogether and treats the fiduciary as if he were a stranger to any trust or confidence reposed in him. It seeks to justify the constructive trust on the ground that the bribe can be said to represent the fruits of the principal's property or former property. It treats the constructive trust as confined to something akin to the misappropriation of property belonging in equity to the principal or which ought to have been obtained for him. In the course of posing the question quoted and previously answeredFootnote ⁶² Lord Neuberger explained the basis of his re-formulationFootnote ⁶³ as follows:

The last sentence is hopelessly confused. It ignores a fundamental feature of the common law, and one which distinguishes it from other legal systems, namely the duality of property. The principal's claim to the bribe received by his fiduciary is not a claim to title; that is vested in the fiduciary, who can dispose of the bribe and pass good title to an unsuspecting purchaser. It is a claim to the beneficial interest in the bribe, that is to say to a right to call on the owner of the legal title to vest it in him. A claim to the beneficial interest is not based on “property law” but on equity.

Equity cannot be fitted into the legal structure bequeathed by the Romans, which divides law into the law of property and the law of obligations. Equity straddles both, giving rise to the paradox referred to above which so puzzles civilian lawyers. Following and tracing are part of our property law, for they are processes which are common to both law and equity and are concerned with the transmission of beneficial interests in property once they have been established. The present question is concerned with the creation of those rights in the first place, and this is the province of equity. Equitable proprietary remedies like specific performance and the constructive trust are not based on property law and have never been confined to the vindication of property rights. They extend to a wide variety of cases where equity, acting on the defendant's conscience, enforces a personal obligation in relation to property.Footnote ⁶⁴ The concept of the trust is the paradigm example; there are many others, including for example mutual wills, where a remedy based on rights of property would infringe the Wills Act.

In the second place there is more to it than the fact that the defendant's breach of duty enabled him to make a profit. What has been left out of account is the nature of the fiduciary relationship itself. Such a relationship is a relationship of trust and confidence in which the principal puts the fiduciary in a position to make a profit and trusts him not to act in his own interests by making it for himself. By acting in breach of the trust placed in him by his principal he deprives him of something more than mere property – he deprives him of the single-minded loyalty on which he relied. The fiduciary's duty is to make the profit, if he makes it at all, for his principal and not himself; and if he does make it equity enforces his obligation to do so for the benefit of his principal.

In the third place, equity is not concerned to give the principal a proprietary interest; it is concerned to prevent the fiduciary from retaining any benefit from his abuse of the trust and confidence placed in him. The remedy is disgorgement, not restitution, and it requires disgorgement in full. It does not matter that this may involve giving his principal a windfall (and the Court will not enquire whether it will do so); better the principal receive a windfall than that the fiduciary retain the profit.

There must of course be a nexus between the fiduciary relationship and the bribe received or profit made, but this is demonstrated by showing that the fiduciary received or made it by making use of information or exploiting an opportunity which came into his possession in the course of the fiduciary relationship. It is sometimes sought to rationalise the fiduciary's liability by treating the relevant information or opportunity as an asset of the principal. But the categorisation of information as property owes more to metaphor than legal accuracy.Footnote ⁶⁵ It has long been discredited, though some such thinking appears to have re-emerged as the basis of the 2011 re-formulation. But there is no need to characterise information as property; the fiduciary's liability as constructive trustee does not depend on whether the information was the property of his principal but on whether it was his duty to use it exclusively for the benefit of his principal and not himself.Footnote ⁶⁶

The first limb of the 2011 re-formulation confounds two entirely different causes of action with different factual requirements: (i) a claim based (somewhat loosely) on the misappropriation or “knowing receipt” of property beneficially owned by the claimant, where the claimant must show that the defendant received property subject to the claimant's beneficial interest but need not be a fiduciary; and (ii) a claim by the principal to a beneficial interest in a bribe received by his fiduciary, where the defendant need not have received property in which the claimant had or ever had had a beneficial interest but must be a fiduciary and must have received the bribe by virtue of his fiduciary position.

If the principal's claim is based on the misappropriation of property belonging beneficially to the principal, then it does not depend on the fact that the defendant was in breach of a fiduciary obligation; any one whether a fiduciary or not (except a bona fide purchaser for value without notice) who receives property which belongs beneficially to another takes the property on trust for that other. Yet all the cases on bribes and secret profits have been based on the no conflict or the no profit rule, and the judges have consistently directed their inquiry into the existence and scope of the fiduciary relationship, questions which are irrelevant under the 2011 re-formulation. Where the cases have caused problems, it has been caused by disagreement either as to the existence of a fiduciary relationshipFootnote ⁶⁷ or as to its scope.Footnote ⁶⁸

The first limb is also too widely stated. The fact that the property had historically belonged beneficially to the claimant is irrelevant if it had ceased to do so before the defendant acquired it. A party who receives property takes it for his own absolute benefit unless it is subject to another's subsisting beneficial interest. Thus a property based rule does not explain why the shares received by the fiduciary were held in trust for the company in the cases concerning bribes received in kind mentioned above. They had never belonged to the company, which had merely had the right to issue them and then only to a third party and for value. Even if the 2011 re-formulation is stretched to include such a case, the vendor was contractually entitled to the shares as part of the purchase price for the property it sold, and the company did not intend to and did not retain a beneficial interest when it issued the shares to the vendor. Had the vendor given the shares to a third party, the transferee would have taken them free of any interest of the company. The only reason that the defendant held the shares in trust for the company was that he was a fiduciary and so under an obligation not to retain them for his own benefit.

The second limb by contrast is too narrowly stated, for there is no requirement that the opportunity was properly that of the principal or that the defendant was under a duty to exploit it for his benefit. Moreover the second limb treats information and opportunity as property, a metaphorical usage which has long been exploded as a matter of law. The fiduciary's breach of duty does not consist of his failure to exploit an opportunity for the benefit of his principal, which if tortious would sound in damages, but of the fact that he exploited it for himself. In doing so he did not appropriate information which belonged to his principal or exploit an opportunity to make a profit which he ought to have obtained for his principal. He is liable because he took advantage of information which came to him in the course of or by reason of a relationship of trust and confidence. The true rule is that previously stated, that being trusted to act in the interests of his principal to the exclusion of his own, a fiduciary is bound either to use the information for the benefit of his principal or not to make use of it at all.

Where a fiduciary who is acting for a purchaser receives a bribe from the vendor, it results in the purchaser paying more for the property than the vendor seeks. It is tempting to describe the difference represented by the bribe as being, not part of the purchase price, but a sum unlawfully abstracted from the principal. This is no doubt accurate enough in economic terms, and has sometimes been put forward as justifying the imposition of a constructive trust, though not as a ground for it.Footnote ⁶⁹ As a matter of law, however, this is problematic to say the least. In the first place, for the claim to succeed on this basis the claimant would have to prove that the bribe was in fact paid out of the purchase money. If the vendor paid the bribe before he received the purchase money or paid it out of his own money, a claim on this basis could not succeed.Footnote ⁷⁰ In some of the cases fulfilment of this condition may be taken for granted, particularly where the bribe consisted of shares which constituted the consideration for the purchase. But in no case has the court made any enquiry whether the bribe was in fact paid out of the purchase money; and where the bribe consisted of shares which did form part of the consideration for the purchase this was not the basis of the court's decision.

In the second place, the 2011 re-formulation does not explain the many cases where the transaction was not one of sale and purchase and there was no connection between the bribe and any property previously beneficially owned by the principal. The most serious casesFootnote ⁷¹ as well most of the cases on secret profits or commissions, some at the highest level, are of this character. It simply cannot be right to make the nature of the liability of a fiduciary who receives a bribe differ according to the nature of the relationship (if any) between his principal and the party who paid the bribe; or on the latter's motive in paying it; or on whether he paid the bribe out of the money he received from the principal or his own. The vice is the same in every case; the bribe deprives the principal of the single and undivided loyalty of his fiduciary unaffected by consideration of his own interests.

Finally, the 2011 re-formulation does not reflect the way in which the principal's claim has been put in the cases or the way in which the courts have decided them. The fact that in a handful of cases, all concerning an agent who acted for a purchaser, the claim could have been formulated in a way which the courts did not adopt does not mean that the basis on which they decided them was wrong.

Lord Neuberger recognised, as Lindley L.J. did not, the importance of ensuring that the fiduciary should be made to disgorge any profit he had made by investing the bribe, and made the remarkable suggestion that the personal duty to account might be “adjusted” to give the principal the profit. This not only contradicts a basic principle of the law of restitution that following and tracing, being part of our property law, require a property base; it rejects the ratio of Lister v Stubbs in a judgment which professes to follow it. But if the claimant has the right to follow the bribe into the hands of a third party or to trace it into its proceeds and recover them or their value, then he has a right of property. You cannot have it both ways. Either the principal can recover the bribe or its traceable proceeds from a third party or he cannot. If he can, he has a right of property, and the basis of the 2011 re-formulation falls away.

In sum, the conditions prescribed by the 2011 re-formulation succeed at one and the same time as being neither necessary nor sufficient, as well as creating further anomalies and being inconsistent with numerous authorities, some at the highest level.

A. Tyrrell v Bank of London

This is among the authorities which Lord Neuberger cited in Sinclair v Versailles as supporting the 2011 re-formulation. Interestingly, Counsel for the successful appellants in Reid cited it as supporting his argument. When the case is properly analysed, it is clear that he was right to do so. The facts are described in the judgments in tedious detail, but can be shortly summarised. Tyrrell was a solicitor acting for a bank which to his knowledge was interested in buying a property known as the Hall of Commerce. He entered into a secret arrangement with the vendor, one Read, who had only recently bought a larger piece of land which included the Hall of Commerce, to take a one half share of the net profit from any sale of the land which Read had acquired.Footnote ⁸⁰ Read and Tyrrell described their arrangement as a “joint speculation”. Tyrrell gave no consideration for his share of the profit. The bank, which never had any interest in acquiring any other part of the land, bought the Hall of Commerce at a price which significantly exceeded Read's cost of acquiring the whole. By the time some four years later that the bank brought proceedings, Tyrrell has probably received and spent his share of the profit, but he still had a half share in the net profit to arise on the eventual sale of the unsold land which presumably stood in the books of the speculation at nil cost. When the proceedings were brought neither Read's cost of acquiring the land nor Tyrrell's half share of the cost had been ascertained.

At first instanceFootnote ⁸¹ Sir John Romilly M.R. found that Read's motive in voluntarily relinquishing a half share in the net profit from a sale of the land he had acquired was to take advantage of Tyrrell's influence with the bank as its solicitor. The critical finding of the Master of the Rolls was that but for his confidential relationship with the bank Tyrrell would never have received a share in the profit, which was due to his role as the bank's agent and his employment as such. He directed the accounts necessary to quantify Read's costs, declared Tyrrell to be a trustee for the bank of his share in “the hereditaments” (by which he meant the unsold land as well as the net profit on the sale of the Hall of Commerce), and ordered him to pay the sum due on the taking of the account and to convey his interest in the unsold land to the bank. The form of the decree in relation to the unsold land shows that he treated Tyrrell as holding the land as trustee for the bank; and since Tyrrell cannot have been possessed of his share of the net profit on the sale of the Hall of Commerce on a different basis, he must have considered him to be a trustee of that profit also. The Master of the Rolls expressed some doubt about the unsold land but, as the Lord Chancellor was to observe, was concerned that if he excluded it from the trust Tyrrell would bear no part of its cost of acquisition.

A three man committeeFootnote ⁸² of the House of Lords unanimously dismissed Tyrrell's appeal but varied the order to exclude the unsold land. In dismissing the appeal in relation to the Hall of Commerce, Lord Westbury L.C. said

As regards the Hall of Commerce, which he described as “the subject matter of the transaction carried out in this relation”, the Lord Chancellor said that Tyrrell “must be converted into a trustee.” His two colleagues agreed with him and gave no additional reasons of their own. Lord Chelmsford observed that if the decree in relation to the Hall of Commerce were not affirmed

It is quite plain that the Committee treated Tyrrell as holding the profits he had made from the sale of the Hall of Commerce in trust for the bank, and that this had nothing to do with any expropriation of part of the purchase money which the bank had paid but was due to the fact that the profit arose from the nature of the relationship between a solicitor and his client.

In Sinclair v Versailles Lord Neuberger considered that the exclusion of the unsold land from the trust supported his approach; but it does not. It was not excluded on the ground that any future profits from the unsold land would not be derived from the purchase money paid by the bank. It was excluded because, in the Lord Chancellor's words, the unsold land was not “the particular subject of the relation between [Tyrrell] and his client”, and the principle could not “be extended further to give the clients the benefit of property and the benefit of an agreement with which they had no concern”. Since the bank did not buy the unsold land and never had any interest in acquiring it, Tyrell owed no duty to the bank in relation to it.

By its order, the form of which the Lord Chancellor proposed and with which Lord Cranworth and Lord Chelmsford agreed, the House (i) varied the decree by substituting a declaration that the bank was entitled to the benefit, not of “the hereditaments” as the Master of the Rolls had decreed, but of Tyrrell's agreement with Read so far as it related to the House of Commerce (which accurately described the relevant part of the interest which Tyrrell had received); ordered that the account be adjusted by disallowing Tyrrell's share of Read's cost of acquiring the unsold land (thereby increasing the amount for which Tyrrell would be liable and meeting the concerns of the Master of the Rolls); and awarded interest on the amount found due at the rate payable by trustees in cases of breach of trust. Although necessarily resulting in a payment of money, the relief granted was unequivocally proprietary in nature.

Lord Cranworth agreed but struck out on a frolic of his own, saying that the case could have been decided on a short ground, viz. that Tyrrell had been guilty of falsely representing that the money paid by the bank for the Hall of Commerce was payable to Read when part was being retained by Tyrrell himself. While this might have justified an award of damages for fraud, it would not have entitled the bank to the relief which it was awarded and with which Lord Cranworth agreed. His remarks must be considered to be an alternative ground justifying the grant of relief, though not the relief contended for or granted, and not a ground of decision.

Lord Chelmsford was a criminal practitioner whose appointment as Lord Chancellor was political. He was no equity lawyer. With the exception of a single passage his speech was entirely orthodox and in agreement with that of the Lord Chancellor. He began by considering the critical question, whether Tyrrell's authority to negotiate on behalf of the bank extended to the whole property or only the Hall of Commerce, and after a detailed examination of the evidence concluded that it was the latter. He agreed with the Lord Chancellor that any profits which Tyrrell might make from a future sale of the unsold land should be disregarded, because, as he put it, the bank's claim “could not be carried beyond the limits of the agency”. This was the same as the reason given by the Lord Chancellor.

Unfortunately in a curious passage to which undue attention has been paid, Lord Chelmsford considered what the position would be if Tyrrell had taken a bribe of £5,000 instead of an interest in the net profit on the sale of the land. He said that in that case the bank would be entitled to damages but could not reach the bribe itself. His answer foreshadows Lister v Stubbs and has been seized upon by its supporters. But the point had not been argued and Lord Chelmsford's opinion was not only unsupported by previous authority but was inconsistent with cases cited in argument which included Fawcett v Whitehouse,Footnote ⁸³ to which he did not refer. Moreover, its relevance is doubtful to say the least, for it has no bearing on the reason which both he and the Lord Chancellor gave for excluding the unsold land from any relief. It is hard to disagree with the summary way in which in Reid Lord Templeman disposed of the passage as “obiter, unnecessary and wrong”.

B. Phipps v Boardman

In Phipps v Boardman Footnote ⁸⁴ the claimant was a beneficiary of a family trust; the defendants were the solicitor to the trustees and another beneficiary. The trust fund included a minority holding in a small private company. The defendants were dissatisfied with the way in which the company's business was being conducted and considered that it would be advantageous to acquire the outstanding shares and reorganise the company's business. The trust was not in a position to acquire the shares. Accordingly the defendants decided to buy the shares for themselves and with their own money. They obtained the consent of two of the three trustees, but the other trustee was an old lady who was senile and in failing health and she was not consulted. The defendants wrote to the beneficiaries to seek their approval and wrongly believed that they had obtained it. They bought the outstanding shares in the company and turned the business round to their own financial benefit as well as that of the trust which continued to have a significant shareholding in the company.

At first instance Wilberforce J. found that the defendants had throughout acted as agents for the trustees, and applied what he described as “the broad principle of equity developed by [the Court of Chancery] in order to ensure that trustees and agents shall not make a profit by reason of their office”. He cited Regal (Hastings) Ltd. v Gulliver to the effect that that there was a breach of this principle when the defendant made a profit “by reason of [his] fiduciary position and by reason of the opportunity and knowledge, or either, resulting from it”. He observed that, as outsiders, they would have been unable to buy the shares, for the vendors dealt with them only because of the substantial and threatening minority shareholding owned by the trust.

Wilberforce J. granted a declaration that the defendants held the shares as constructive trustees for the claimant, ordered an account of the profits derived by the defendants from the shares (which would include dividends and other receipts) and an inquiry what sum it would be proper to allow to the defendants for their work and skill.Footnote ⁸⁵ All three components of the order were unequivocally proprietary in character. The judge did not award interest but ordered an account of the profits actually derived from the holding of the shares; and he directed an inquiry to ascertain the sum which should be paid to the defendants by way of a “just allowance” in recognition of the fact that they had acted in good faith and that the increase in the value of the shares was in large measure due to their work and skill in turning the business round. This was formerly regarded as the exercise of an incidental power of the court of equity in its supervisory jurisdiction over trusts, and may today be more generally considered as a restitutionary claim for work carried out by one party which has improved property belonging to another. On appeal the order was affirmed by the Court of Appeal and the House of Lords.

It will be observed that the defendants bought the shares with their own money and that they could not possibly be said to have been under a duty to obtain the shares for the trust. Nor did they make use of any property (at least in the normal sense) belonging to the trust. Their breach consisted of taking personal advantage of information and an opportunity which only came their way because of their fiduciary relationship with the trustees. Insofar as they took advantage of the trust's minority shareholding, they were taking advantage of their ability to represent the trustees as their agent not of property which “properly” belonged to the trust.

Two of the majority of the Appellate CommitteeFootnote ⁸⁶ considered that such information could be characterised as property, so that the defendants could be said to have made a profit by making use of property belonging to the trust. The thirdFootnote ⁸⁷ held that information could not be characterised as property, but that it was sufficient that the defendants had taken advantage of information which they had obtained in the course of and by virtue of their fiduciary position. Lord Upjohn, who dissented,Footnote ⁸⁸ roundly rejected the characterisation of information as property, and on this point his opinion is generally regarded as correct today.Footnote ⁸⁹

In view of the diversity of opinions expressed by the members of the Appellate Committee, it is not easy to extract the ratio. But given the fact that a majority upheld the order while a different majority rejected the argument that the defendants had misappropriated property belonging to the trust, it is difficult to fault Professor Virgo's analysisFootnote ⁹⁰ is that the defendants had profited from their position as fiduciaries by exploiting information which they had obtained while acting in that capacity. As he puts it,

Even if this analysis is not accepted, as in the author's opinion it should be, the decision that proprietary relief was available is incompatible with the 2011 re-formulation. That is because the case shows that there may be two different grounds for awarding such relief, whereas the 2011 re-formulation allows for only one of them.