+ 2(,1 1/,1(Citation: 5 K.C.L.J. 143 1994-1995

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Case Notes

PROPERTY RIGHTS: THE LIMITS OF ASCERTAINABILITY

The lengthy complex judgment of the Privy Council in Re GoldcorpExchange Ltd [1994] 2 All E.R. 806 is illuminating on the need forcertainty in transferring or creating legal or equitable title to propertybut not so illuminating on the ascertainability parameters of equitabletracing. The case arose upon the liquidation of Goldcorp ExchangeLtd. ("Goldcorp") having massive debts, including one secured by afloating charge of the Bank of New Zealand. Many customers hadpaid Goldcorp for the purchase of gold, silver and platinum bullionwhich had to be delivered if seven days notice was given. Meanwhile,Goldcorp had to keep separate bulk stocks of each type of bullionas a safeguard for the customers when delivery was called for. Thesecustomers, who received "non-allocated invoices" in respect of theamount of bullion which they expected to be within the bulk storedby Goldcorp, were called the "non-allocated claimants". Theyclaimed to have a proprietary interest in the bullion or in theirpurchase moneys so as to give them a proprietary remedy againstthe bullion or other assets of Goldcorp. These alternatives wererejected by the Privy Council.

Goldcorp's contract was for the sale of unascertained genericgoods obtained from any source. No legal or equitable title couldpass, by the very nature of things, until specific bullion for a specificcustomer had been ascertained. Until then the contract could befulfilled by furnishing any parcel of bullion answering the contractualdescription. The Privy Council fully endorsed Re London Wine(Shippers) Ltd. [1986] P.C.C. 121, Re Wait [1927] 1 Ch. 606 andMac-Jordan Construction Ltd v. Brookmount Erostin Ltd [1992]B.C.L.C. 350, accepting that even in "ex-bulk" cases, like the lattertwo, where there is a fixed source held by the vendor from withinwhich the vendor may make his own choice, no title at law or inequity can pass until the ascertainment of particular chosen property.It seems to follow that Hunter v. Moss [1994] 1 W.L.R. 452 (C.A.)noted supra p. 139, decided after judgment was reserved by the PrivyCouncil, was erroneously decided.

Did it make a difference that when Goldcorp purchased bullion"the company promised to maintain bullion separate from its owntrading stock which would stand as security that the bullion wouldbe available when the customer called for delivery" (p.820), thoughin fact no separate stock was created? The Privy Council held not,because such a promise did not create any kind of equitableproprietary interest and, even if it did, no separate ascertainablecustomers' stock had ever been created in which equitable interestsin specific property could have existed.

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In theory, however, it seems possible for a company to declarethat on using customers' moneys to purchase bullion it will holdsuch bullion on trust for the customers as equitable tenants incommon but upon trust to add it to bullion already held forcustomers as part of a pooled mass: each customer will have aproportionate share as tenant in common exactly corresponding tothe amount of bullion purchased for each customer, but the companywill have power to deliver bullion, free from other customers'equitable tenancies in common therein, to a particular customer insatisfaction of his proportionate share in the pooled mass. Oncespecific bullion has been purchased with customers' moneys "equitylooks on as done what ought to be done" so that these customershave equitable proprietary rights in the bullion which are protectedby a proprietary tracing remedy.

It seems that the Privy Council had such "a contorted legalrelationship" (p.821) in mind when Lord Mustill stated: "theirLordships find it hard to reconcile with the practicalities of thescheme for it would seem to involve that the separated bulk wouldbecome the source from which alone the sale contracts were to besupplied, whereas it is impossible to read the collateral promises ascreating a sale ex-bulk" (p.820). Can one not, however, accept that,while Goldcorp could buy the bullion from any source, once it hadbought the bullion then the customer whose money had been usedto buy the bullion would have a beneficial interest in a proportionateshare of the bulk to which the bullion had been added? The crucialissue then is whether it is the customer's money that is used topurchase the bullion or whether it is Goldcorp's money. However,as the Privy Council later held: "This is not a situation where thecustomer engaged the company as agent to purchase bullion on hisbehalf with immediate payment to put the agent in funds ... Theagreement was for a sale by the company to, and not the purchaseby the company for, the customer. .. There was nothing whichconstrained in any way the company's freedom to spend the purchasemoney as it chose or to establish the stock from any source and withany funds as it thought fit." (p.824).

Lord Mustill also concluded that it did not help to try to label thecompany "a fiduciary" because "the essence of a fiduciary relationshipis that it creates obligations of a different character from thosederiving from the contract itself" and no submission "went beyondsuggesting that by virtue of being a fiduciary the company wasobliged honestly and conscientiously to do what it had by contractpromised to do" (p.821). Neither could the claimants establish anyproprietary claims by trying to rely on the contracts having beenvitiated by misrepresentation or mistake because no rescission hadoccurred before crystallisation of the Bank's floating charge. Indeed,

Case Notes

even if it had occurred, it would only have given rise to a personalclaim to an equivalent sum of money and not to a proprietary claim.However, this was simply asserted by the Privy Council without anyconsideration being given to El Ajou v. Dollar Land Holdings plc[1991] 3 All E.R. 717, 734, Lonhro plc v. Fayed No. 2 [1991] 4 AllE.R. 961, 971, Daly v. Sydney Stock Exchange (1986) 160 C.L.R.371, 387-390 or Alati v. Kruger (1954) 94 C.L.R. 216, 234 endorsedby the Court of Appeal in O'Sullivan v. Management Agency [1985]3 All E.R. 351, 365. These cases indicate that some equitable title tothe transferred property revests upon the rescission so as to supportan equitable tracing claim, assuming that such property has not beendissipated. The Privy Council's restrictive view on this issue shouldnot, therefore, be relied upon.

Finally, even if the claimants had been able to assert a proprietaryinterest over the purchase moneys, the Privy Council found "itdifficult to understand how the judgment of the Board in SpaceInvestments [1986] 1 W.L.R. 1072 would enable them to overcomethe difficulty that the moneys said to be impressed with the trustwere paid into an overdrawn account and thereupon ceased to exist".(p.827).

This type of difficulty faced the other class of claimants who hadbought bullion from Walker & Hall Commodities Ltd. before it hadbeen acquired by Goldcorp. The bullion representing their purchases"was stored en masse, but it was kept separate from the vendor'sown stock. Furthermore, the quantity of each kind of bullion keptin this pooled mass was precisely equal to the amount of Walker &Hill's exposure to its contracts with customers. The documentationeffect was that the vendor did not claim title in the bullion describedin the document and that the title to that bullion, and the risk inrespect of it, was with the customer. The document also stated thatthe vendor held the bullion as custodian for the customer in safestorage" (p.829). Thus, Thorp J. had held that "the customers as awhole had a shared interest in the pooled bullion which the vendorheld on their behalf" (p.829), so that when Goldcorp absorbed thehitherto separated bullion into its own trading stock and thereafterdrew upon the mixed stock it wrongfully dealt with goods whichwere not its own. He then "applied conventional principles of tracingand concluded that the proprietary recoveries of the Walker & Hillclaimaints could not exceed the lowest balance of metal held by thecompany between the accrual of their rights and the commencementof the receivership: see James Roscoe (Bolton) Ltd v. Winder [1915]1 Ch. 62" (p.830), so the Bank was willing to abide by Thorp J.'sdecision.

However, because the lowest balance was very low the claimantssought to go further by claiming an equitable charge on all

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Goldcorp's assets at the date of receivership to recover the value oftheir dissipated bullion, and a majority of the New Zealand Courtof Appeal had so held on the basis of Lord Templeman's notoriousobservations in Space Investments [1986] 1 W.L.R. 1072, 1074, thatif a bank trustee unlawfully borrows trust money for its own generalpurposes, "Equity allows the beneficiaries to trace the trust moneyto all the assets of the bank and to recover the trust money byexercise of an equitable charge over all the assets of the bank."Intriguingly, Lord Templeman was a member of the Board in theGoldcorp case but Lord Mustill stated, "It is not necessary orappropriate to consider the scope and ambit of the observations inSpace Investments or their application to trustees other than banktrustees because all members of this Board are agreed it would beinequitable to impose a lien in favour of the claimants," there being"no evidence that Walker & Hall bullion continued to exist as afund latent in property vested in the receivers." (p.832).

However, some comment was made on such "observations" whenthe Board noted Professor Goode's criticisms of them at (1987) 103L.Q.R. 445-447, which were partly based on dicta in Re Diplock[1948] Ch. 465, 521 including, "The equitable remedies pre-supposethe continued existence of the money either as a separate fund or aspart of a mixed fund or as latent in property acquired by means ofsuch a fund." The Privy Council then stated "In the case of a bankwhich employs all borrowed moneys as a mixed fund for the purposeof lending out money or making investments, any trust moneyunlawfully borrowed by a bank trustee may be said to be latent inthe property acquired by the bank, and the court may impose anequitable lien on that property for the recovery of the trust money"(p.8 3 1). Even though this lien seems restricted to property acquiredby the bank after the unlawful borrowing, it amounts to theprovision of a very generalised form of security (with priority overunsecured creditors), obviating the normal necessary requirement totrace precisely what has happened to the trust property, unless onecan implicitly restrict this lien further to specific choses in action orinvestments, taking account of the principles underlying Re Oatway[1903] 1 Ch. 356 and James Roscoe (Bolton) Ltd. v. Winder [1915]1 Ch. 62.

Indeed, if the mixed fund were made up half of bank and half oftrust money and if half the mixed fund had actually been used topurchase Whizzo shares which had trebled in value, while half hadbeen paid by way of loan to X Ltd.'s account which had thenbecome overdrawn so that there could be no right to trace, surelythe beneficiaries can specifically claim the Whizzo shares rather thanbe relegated to a charge over the bank's assets? If, instead, it isimpossible for the beneficiaries to trace their money into any

Case Notes

particular asset belonging to the trustee bank then why should thatnot be an end to it, so that there is no right to trace? After all, inpractice there surely ought to be some paper trail, even though suchtrail may lead to frustration on the basis of Roscoe v. Winder.

Traditional tracing principles require ascertainment of specificproperty whose acquisition involves the use of the trust property orits product, so that if the traced property has appreciated in valuethe beneficiaries can claim the whole or a proportionate share of itor, otherwise claim a charge over it. It takes a quantum leap forthere to be an equitable charge on all the assets of a wrongdoingtrustee or fiduciary, or all those assets acquired after the breach oftrust or fiduciary duty, as security for a claim for such breach unlessthe beneficiaries are better off by being able to trace their propertyinto specific property that has appreciated in value. Any suchcircumvention of the insolvency legislation ought surely to be left tolegislation. What is most surprising about the Privy Council'sdecision is how open the judges were to consider the flexibleimposition of remedial restitutionary proprietary rights, though inthe circumstances, ultimately rejecting them. Perhaps, this was theprice Lord Mustill had to pay to obtain the agreement of LordTempleman, Lord Lloyd and Sir Thomas Eichelbaum to hisjudgment, a single Board judgment being required where all concurin the result. It is hoped that future litigation will further discountLord Templeman's observations and also uphold the equitable rightto trace property transferred by virtue of mistake or fraudulentmisrepresentations.

DAVID HAYTON*

COME BACK NOEL RILEY

Human rights jurisprudence is now so odd that a decisionguaranteeing speedy execution for prisoners facing the death penaltyhas been celebrated as a victory for freedom and for human dignity.In Pratt v. Attorney General for Jamaica [1993] 4 All E.R. 769, thetwo appellants were convicted of murder and sentenced to death inJanuary 1979. The years that followed were a litany of delay andculpable neglect on the part of the authorities. The Court of Appealin Jamaica took almost two years to decide not to allow the men'sapplications for leave to appeal. Nothing then happened for over

* Professor of Law, King's College London.