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THE LAW OF RESCISSION

SECOND EDITION

DOmINIC O’SullIvaNSTEvEN EllIOTT

Rafal ZakrzEwSkI

OSullivan030614OUK.indb 3 11/13/2014 3:38:12 PM

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3Great Clarendon Street, Oxford, OX2 6DP,

United Kingdom

Oxford University Press is a department of the University of Oxford.It furthers the University’s objective of excellence in research, scholarship,

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© D O’Sullivan, S Elliott, R Zakrzewski 2014

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1

CORE DISTINCTIONS

A. Introduction 1.01B. Termination Ab Initio and De Futuro 1.06

(1) Nature and basis of the distinction 1.07(2) Termination ab initio: effects on

contractual rights and obligations 1.14(3) Termination de futuro: effects on

contractual rights and obligations 1.20(4) Termination ab initio and de

futuro: rights to restitution 1.23(5) Terminology 1.31

C. Void and Voidable Contracts 1.35(1) Void and voidable contracts 1.36(2) Contracts valid until rescinded and

contracts ineffective until ratified 1.39

(3) Transfer of title 1.45(4) Recovery of benefits 1.49

D. Rescission and Transactions Ineffective in Equity 1.57

(1) Introduction 1.57(2) Where the claimant is not a party to

the impugned transaction 1.67(3) Where the claimant is a party to the

impugned transaction 1.70(4) Bribes 1.85(5) Apparent gifts made ineffective by

resulting trust 1.88(6) Other ineffective transactions 1.89

A. Introduction

This Chapter is concerned to identify the concept of rescission. It does this by distinguishing rescission from neighbouring concepts. In the course of the survey some frequent sources of confusion are clarified, and the shape of rescission outlined.

The term ‘rescission’ is often and confusingly used to describe two quite different ways in which a contract may be brought to an end. One form of ‘rescission’ is founded on a defect in the formation of the contract, arising by reason of fraud, duress, undue influence, or other invalidating cause. The defect affects consent, and entitles one of the parties to extinguish the agreement as from the beginning, or ab initio.1 But a contract may also be brought to an end by reason of the other party’s later non-performance or defective performance, or because it has become frustrated: the contract was properly formed, but then not carried out in accordance with its terms. When a contract is ‘rescinded’ for breach or frustration in this way it is terminated only in respect of future rights and obligations, or de futuro.

This work is only concerned with ‘rescission’ in the first of these two senses of the word, and uses the term to refer to terminating a contract ab initio, or the setting aside of a voidable gift. Terminating a contract ab initio is therefore a synonym for its rescission. The law regulating termination for breach or frustration is considered only in order

1 Gifts may also be rescinded. The rescission of gifts is governed by special rules and is discussed in Chap 29.

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I. Introduction

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to underline the distinctions between terminating a contract ab initio and de futuro (see Part B of this chapter).

A contract that is valid until rescinded is called a voidable contract, and is to be distin-guished from a void contract, which is an apparent contract that never comes into being. The chapter distinguishes voidable and void contracts, and then further distinguishes voidable contracts from contracts that are ineffective until ratified (see Part C of this chapter). These distinctions are important, for the law of rescission is concerned only with voidable contracts, and is not concerned with void contracts, or contracts that are ineffec-tive until ratified.

Legal and beneficial title to property passes under a voidable contract, but may be regained upon rescission. Voidable gifts largely follow the same pattern. Transactions of this kind are to be differentiated from contracts and gifts where no beneficial title effectively passes, so that the transaction is made ineffective in equity as from the outset. This distinction is also considered (see Part D of this chapter), and is important because transactions that are ineffective in equity are, like void contracts, outside the scope of the law of rescission.

B. Termination Ab Initio and De Futuro

This section explains the distinction between terminating a contract ab initio and de futuro, and notes the confusing way in which the terms ‘rescind’ and ‘rescission’ are used to describe both of these modes of termination.

(1) Nature and basis of the distinction

Whereas rescinding a contract for fraud or other vitiating event terminates it ab initio, or from the beginning, when a contract is brought to an end for subsequent breach or frustra-tion, it is terminated de futuro, or for the future. Sir Owen Dixon summarized the distinc-tion in McDonald v Dennys Lascelles Limited:

When one party to a simple contract, upon a breach by the other contracting party of a con-dition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further per-formance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach likewise continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach.2

2 (1933) 48 CLR 457, 476–77. It has been said that this passage provided the blueprint for s 8(3) and (4) of the Contractual Remedies Act 1979 (NZ): Garratt v Ikeda [2002] 1 NZLR 577 (CA) [11].

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In England this distinction was fully elaborated only in the second half of the twen-tieth century.3 Misconceptions that culminated in the decision in Horsler v Zorro4 prompted some of the clearest extra-judicial explanations of the nature and basis of the distinction.5 Eventually the law was definitively restated in Johnson v Agnew.6 The divide between termination ab initio and de futuro is also recognized in Canada,7 Singapore,8 and Malaysia.9 In New Zealand, on the other hand, it has been abolished by statute so far as rescission for misrepresentation is concerned.10 German law does not recognize the same distinction.11

It is now accepted that it is the character of the event that confers the right to terminate which is of decisive importance in explaining the entitlement to termination ab initio and de futuro. In the case of termination ab initio there is a defect in the formation of the contract, whereas termination de futuro involves a later, defective performance, or impossibility of performance. Hence, it is said, the contract in the former case can be undone from the start, whereas in the latter it can only be truncated for the future.12 Indeed, according to Birke Häcker, whilst it may be usual to speak of a party rescinding his or her ‘contract’, it is more accurate to say that the party entitled to rescind ‘can revoke his or her defective consent to the agreement’.13

3 See Chap 3, paras [3.30]–[3.31].4 [1975] 1 Ch 302; and see Hurst v Bryk [2002] 2 AC 185, 193. (But cf Gunatunga v DeAlwis (1996) 72 P

& CR 161 (CA), described in Howard-Jones v Tate [2012] 1 P & CR 11 (CA) as having ‘seriously questionable authority’ (Lloyd LJ).)

5 M Albery, ‘Mr Cyprian Williams’ Great Heresy’ (1975) 91 LQR 337; F Dawson, ‘Rescission and Damages’ (1976) 39 MLR 214; AM Shea, ‘Discharge for Performance of Contracts by Failure of Condition’ (1979) 42 MLR 623, 630–31; and by way of background, S Williston, ‘Repudiation of Contracts’ (1901) 14 HLR 317, 421; PS Atiyah and GH Treitel, ‘Misrepresentation Act 1967’ (1967) 30 MLR 369, 370–71; WMC Gummow, (1976) 92 LQR 5. See also Hunt v Hyde [1976] 2 NZLR 453.

6 [1980] AC 367, 397; Hurst v Bryk [2002] 2 AC 185, 193–94. In the insurance context, Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2003] 1 AC 469, 494. See also Howard-Jones v Tate [2012] 1 P & CR 11 (CA).

7 Guarantee Company of North America v Gordon Capital Corporation [1999] 3 SCR 423, 439–41.8 Lim Lay Bee v Allgreen Properties Ltd [1999] 1 SLR 471 (CA) 483–84.9 Samah v Shah Alam Properties Sdn Bhd [1999] MLJU 144 (CA, Kuala Lumpur), citing Contracts

Act 1950 (Malaysia), s 19; Specific Relief Act 1950 (Malaysia), Ch IV ‘Rescission of Contracts’; cf Specific Relief Act 1950 (Malaysia), s 34, which prescribes the instances where a court may adjudge rescission, and draws no explicit distinction between termination ab initio and de futuro. See also Indian Contracts Act 1872, s 19, 64.

10 Contractual Remedies Act 1979 (NZ) ss 7, 8, and 9. But the 1979 Act does not alter the common law rule that accrued obligations remain following termination for breach: Brown v Langwoods Photo Store Ltd [1991] 1 NZLR 173 (CA) 176; Garratt v Ikeda [2002] 1 NZLR 577 (CA). See also Hunt v Hyde [1976] 2 NZLR 453, 457 (Casey J).

11 R Zimmermann, ‘Restitution after Termination for Breach of Contract in German Law’ [1997] RLR 13. See also BGB article 142(I): ‘If a transaction liable to be rescinded is rescinded, it is deemed to have been null and void from the outset’ (discussed in Zimmermann, 13–14).

12 M Albery, ‘Mr Cyprian Williams’ Great Heresy’ (1975) 91 LQR 337, 337–38; E Peel, Treitel: The Law of Contract (13th edn, 2011) [9-082]; also Buckland v Farmar and Moody [1979] 1 WLR 221 (CA) 231–32, 237; and in the insurance context Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2003] 1 AC 469, 494–95. As to the relationship between defective consent and termination ab initio, S Worthington, ‘The Proprietary Consequences of Rescission’ [2002] 10 RLR 28, 29–30. See also York Street Mezzanine Pty Ltd (in liq) v McEvoy (2007) 162 FCR 358 [41] (‘the right once exercised operates ab initio on the ground that the fraud or misrepresentation is an initial invalidating cause’) (Finkelstein J, FCA); Prest v Petrodel Resources Ltd [2013] 2 AC 415 [18].

13 B Häcker, Consequences of Impaired Consent Transfers (2013) p 21, fn 19, also pp 154, 163, 199.

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I. Introduction

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Contrast with the United States of America

The law in the United States has taken a different path. The Third Restatement of Restitution explains that ‘rescission’ as a remedy adapted to restoring both contracting parties to their pre-contractual position is available also for a subsequent repudiation or other material breach of contract.14 In such cases the right is, however, both more restricted and more eas-ily lost, than if it is based upon fraud, mistake, or other pre-contractual conduct affecting consent.15 The remedy is, however, essentially the same in both types of case; in particular, in both cases rescission involves the mutual restitution in specie of property transferred, and mutual repayments of sums paid, so as to effect a restoration of the status quo ante.16

The justification for rescission is, however, said to be significantly different in the two fact patterns. Whereas rescission in cases of ‘defective agreement’, such as fraudulent misrepre-sentation, mistake, or undue influence, ‘reverses a transfer that lacks an adequate legal basis and prevents the unjustified enrichment that would otherwise result on either side’, the justification for rescission following defective performance ‘is not the avoidance of unjust enrichment, but a concern with fairness to the injured party combined with remedial econ-omy’.17 ‘Remedial economy’ means the efficiency of restoring in specie benefits conferred under a contract, rather than incurring the time and effort to value expectation damages for breach.18 A premise underpinning this distinction is that rescission and restitution for material breach is a remedy for breach of contract,19 whereas rescission for a prior invalidat-ing cause is not.

The position in the United States appears to be a further extension of the old cases that permitted ‘rescission’ and monetary restitution as a remedy for the other party’s repudia-tion, at a time when no distinction was drawn between ‘rescission’ for pre-contractual fraud and for subsequent breach.20 In English law this path forward, fostered by the line of cases culminating in Horsler v Zorro,21 was effectively blocked by the decision in Johnson v Agnew,22 after which a sharp distinction is to be drawn between rescission

14 Restatement (Third) of Restitution § 37 and § 54 (2011). Also, A Kull, ‘Rescission and Restitution’ (2006) 61 The Business Lawyer 569, 581–84 (discussing how the Third Restatement of Restitution breaks from the Restatements of Contracts, which are said to have confused the law in the United States by their failure to employ the term ‘rescission’ at all, or to properly describe it as a remedy for breach permitting restoration of both parties to the status quo ante).

15 Restatement (Third) of Restitution § 37 and § 54, esp § 37(2) (2011) (rescission for breach not avail-able if defendant’s only obligation is to pay money), vol 1, p 622 (no rescission for breach of executed con-veyance of real property, but rescission permitted if transaction defective from inception, as for fraud or undue influence); § 54(4) (rescission for breach barred more easily than in cases of defective agreement, if counter-restitution is difficult); § 54 cmts. d and e (comparing rescission ‘of defective agreements’ and ‘as a remedy for breach of contract’, and identifying the more limited availability of the latter).

16 Restatement (Third) of Restitution § 37 and § 54 (2011).17 Restatement (Third) of Restitution vol 2, pp 270, 271 (2011). The Third Restatement elsewhere

observes that restitution following rescission is not always coincident with the reversal of an unjust enrich-ment: Restatement (Third) of Restitution vol 1, pp 6–7, 165–66, 607–08, vol 2 p 266 (2011). It is said that ‘no issue of restitution’ is presented by the avoidance of a wholly executory contract: Restatement (Third) of Restitution vol 1, p 167 (2011).

18 Restatement (Third) of Restitution vol 1, p 613; vol 2, pp 267, 271, 286, 324, col 1 (2011) Also, A Kull, ‘Rescission and Restitution’ (2006) 61 The Business Lawyer 569, 577 (remedial economy the ‘primary justi-fication’ for rescission for breach).

19 Restatement (Third) of Restitution vol 1, pp 606–07, 613, vol 2 p 271 (2011).20 Chap 3, para [3.27], also paras [3.30] and [3.31].21 [1975] 1 Ch 302; see M Albery, ‘Mr Cyprian Williams’ Great Heresy’ (1975) 91 LQR 337.22 [1980] AC 367, 397.

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ab initio for an initial invaliding cause, and termination de futuro for repudiation or other subsequent breach.23 Precisely why the law in the United States has chosen its own importantly different path is unclear.24 One reason may be that law in the United States did not ever develop the distinction between terminating a contract de futuro for breach and erasing it ab initio for defective consent that came to be recognized in English law and elsewhere.25

The approach in the United States is unlikely to take hold in England or Australia, for permitting rescission of a contract ab initio for its subsequent breach is at odds with the rationale underpinning the remedy as it is now conceived, which is that the contract can be unwound as from the beginning precisely because there was a defect in its forma-tion.26 The outcome achieved is also quite different from the basic objective of relief for breach of contract, which is to place the innocent party in the position that they would have occupied had the contract been performed, rather than in the position they were in before the contract was concluded (a point underlined in the Third Restatement27). The essentially bilateral concern of rescission is, also, at odds with the unilateral object of compensation for breach of contract, which focuses upon the position of the innocent party and not also on the position of the party in default.28 Moreover, in those instances where restitution is permitted following termination for breach of contract, English law tends to view the right arising as founded upon the reversal of unjust enrichment.29 For the Third Restatement the right is founded upon considerations of fairness to the injured party and remedial efficiency and not upon the reversal of unjust enrichment.30 Also, the Third Restatement explicitly identifies rescission and restitution as remedies for breach of contract.31 In English law, all rights to restitution in the nature of the old common counts arise independently of the terminated contract, and outside it, and cannot be character-ized as remedies for breach.32

23 See further paras [1.07]–[1.09].24 For the development of the position in the United States described in the Third Restatement of Restitution,

see A Kull, ‘Rescission and Restitution’ (2006) 61 The Business Lawyer 569; Restatement (Third) of Restitution vol 1, pp 606–09 (2011).

25 See paras [1.07]–[1.09].26 See para [1.09].27 Restatement (Third) of Restitution vol 1, p 613, vol 2, p 271 (2011)—when rescission affords an alterna-

tive remedy for breach of a valid and enforceable contract it ‘permits the injured party to make a fundamental election, choosing to go backward (to the status quo ante) instead of forward (by enforcement of the con-tractual exchange)’.

28 See further Chap 13, paras [13.01]–[13.05]. Cf the right of a contracting party to terminate for breach and bring money had and received if there has been or if he can effect a total failure of consideration; as where the buyer of non-conforming goods rejects them and recovers the price paid, plus damages for breach (para [1.20]).

29 See, eg, E Peel, Treitel: The Law of Contract (13th edn, 2011) chap 22, discussing claims for res-titution following termination of a contract for breach under the rubric of ‘unjust enrichment’. Also, A Burrows, A Restatement of the English Law of Unjust Enrichment (2012) § 15 (and commentary thereto), 20–21, 86–92.

30 Para [1.11].31 Restatement (Third) of Restitution vol 1, pp 606–08, 613, vol 2, p 271 (2011).32 In English law, breach of contract operates by permitting the contract to be terminated, and termina-

tion is a necessary condition for a claim to restitution for failure of consideration: but the right to restitu-tion itself arises ex contractu, from the fact of an unjust or unjustified enrichment, and not from the breach itself. Also, A Burrows, A Restatement of the English Law of Unjust Enrichment (2012) § 15 (and commentary thereto), pp 20–21, 86–92, 166–67.

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I. Introduction

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(2) Termination ab initio: effects on contractual rights and obligations

A voidable contract is valid and effective until rescinded. When it is rescinded, ‘the contract is treated in law as never having come into existence’,33 albeit the law recognizes that there once was a contract.34 With certain narrow exceptions noted later, all rights and obligations existing by virtue of a contract at the moment of termination are dissolved. In order to iden-tify these rights and obligations, it is necessary to distinguish contractual obligations that remain unperformed at the date of termination from those which have been performed. These are sometimes described as ‘executory’ obligations and ‘executed’ obligations.

Termination ab initio extinguishes all unperformed or executory obligations. In the case of obligations to be performed in the future this means the requirement to perform never arises. In the case of obligations the performance of which was overdue as at the date of ter-mination, the defaulting party is released from the requirement to perform. This includes obligations that had unconditionally accrued, and which would have survived termination for breach, such as the obligation to pay a deposit.35

Termination ab initio likewise dissolves unperformed obligations intended to remain enforce-able after the contract has been brought to an end, such as liquidated damages clauses, unless they can be construed as severable and unaffected by the vitiating factor. Arbitration clauses are the familiar example.36 These are, however, unlike other terms in that the clause is itself a separate contract between the parties. There is Australian authority that exclusive jurisdiction clauses may also survive rescission ab initio,37 and English support for this in the context of insurance.38 Exclusive jurisdiction clauses are not, however, separate agreements like arbitration clauses, and the juristic basis for their survival is unclear. An underwriter’s contractual rights to investigate may also survive rescission of a policy of insurance, according to one judge.39

33 Johnson v Agnew [1980] AC 367, 393; Islington London Borough Council v Uckac [2006] 1 WLR 1303 (CA) [26].

34 Mackender v Feldia AG [1967] 2 QB 590 (CA) 603 (Diplock LJ); FAI General Insurance Company Ltd v Ocean Marine Mutual Protection and Indemnity Association Ltd (1997) 41 NSWLR 559, 563; [1998] Lloyd’s Rep IR 24: ‘The words are sufficient for most purposes but they cannot be taken literally. Neither rescission by a party or a judge’s say so can turn back the clock to have that literal effect, and a contract avoided ab initio is not, in Newspeak, an uncontract. . . it remains that there was a contract’ (exclusive jurisdiction clause surviving rescission); approved Brit Syndicates Limited v Grant Thornton [2006] EWHC 341 (Comm) [24].

35 McDonald v Dennys Lascelles Limited (1933) 48 CLR 457, 476–77; Johnson v Agnew [1980] AC 367, 396–97; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844; Colonial Bank v European Grain and Shipping Ltd [1989] AC 1056, 1098–99; see also Hurst v Bryk [2002] 2 AC 185, 199–200.

36 Arbitration Act 1996, s 7, following the approach in Harbour Assurance Co (UK) v Kansa Ltd [1993] QB 701 (jurisdiction existed where allegation that contract void ab initio), and moving beyond the position in Heyman v Darwins Ltd [1942] AC 356, 398 (suggesting arbitration clause dissolved). In Australia, Ferris v Plaister (1994) 34 NSWLR 474 (NSWCA) (arbitrator had jurisdiction where allegation that building con-tract rescinded for fraud). Cf where the arbitration agreement is independently void or voidable: Vee Networks v Econet Wireless International Ltd [2005] 1 Lloyd’s Rep 192 [19]–[22]; Fiona Trust & Holding Corporation v Privalov [2007] 1 All ER (Comm) 81 [36]; [2007] 1 All ER (Comm) 891 (CA) [23]–[29]; Premium Nafta Product Limited v Fili Shipping Company Limited [2007] 2 All ER (Comm) 1053 (HL) [19], [35].

37 FAI General Insurance Company Ltd v Ocean Marine Mutual Protection and Indemnity Association Ltd (1997) 41 NSWLR 559, 564, 567; [1998] Lloyd’s Rep IR 24.

38 Mackender v Feldia AG [1967] 2 QB 590 (CA); Brit Syndicates Limited v Grant Thornton [2006] EWHC 341 (Comm) [22]. For the argument that there exist further exceptions in the context of insurance, M Clarke, ‘Rescission: a bridge too far for insurance good faith’ [2012] LMCLQ 611, 612.

39 Strive Shipping Corporation v Hellenic Mutual War Risks Association (The Grecia Express) [2002] 2 Lloyd’s Rep 88, 163, where Colman J seemed to regard the principle that such rights survive termination for breach as being equally applicable to rescission for non-disclosure. But the survival of contractual terms after

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If property or money is conditionally transferred under a contract, such that there is upon termination de futuro a contractual obligation to return or repay it, termination ab initio dissolves that obligation.

On the other hand termination ab initio cannot terminate or dissolve contractual obliga-tions that have already been performed, for following performance no obligation remains. Where a contractual obligation has been performed, termination ab initio takes effect by extinguishing the so-called secondary obligation to pay damages for any breach of that obli-gation.40 Liability to pay damages for breach of contract is an obligation ‘arising from the contract’, which is the ‘source’ of that obligation.41 Rescission of an agreement that has been performed extinguishes the contract from the start by dissolving any liability for breach.42

Equitable relief founded on the existence of contractual obligations, such as a claim for the specific performance of a contract, or an injunction to protect contractual rights, is likewise unavailable following rescission.43

(3) Termination de futuro: effects on contractual rights and obligations

A contract terminated by one party for the other’s breach or repudiation, or terminated automatically by reason of frustrating events, is terminated de futuro, or for the future.44 The prospective nature of termination de futuro means that although obligations that would have fallen due after the date of termination are extinguished, thus discharging the parties from the need to perform them, rights and obligations that have uncon-ditionally accrued prior to termination remain enforceable.45 Unpaid deposits46 and certain kinds of instalment payments47 are the most common examples. Whether or not a right has unconditionally accrued depends upon a range of factors.48 These include the nature of the obligation, what performance has been rendered by each party, and

termination is founded on presumed intention, whereas their survival after rescission ab initio seems to be based on the idea that the obligation is severable and unaffected by the vitiating factor.

40 Evans v Benson & Co [1961] WAR 12, 17.41 Lep Air Services Ltd v Rolloswin Investments Ltd [1973] AC 331, 350; Photo Production Ltd v Securicor

Transport Ltd [1980] AC 827, 845.42 Holland v Wiltshire (1954) 90 CLR 409, 416, approved Johnson v Agnew [1980] AC 367, 397.43 Where rescission has become impossible, the vitiating conduct may still operate to bar a claim to spe-

cific performance: AH McDonald and Company Pty Ltd v Wells (1931) 45 CLR 506, 513.44 McDonald v Dennys Lascelles Limited (1933) 48 CLR 457, 476–78; Heyman v Darwins Ltd [1942] AC

356, 399; Johnson v Agnew [1980] AC 367, 397; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844; Hurst v Bryk [1999] Ch 1 (CA) 12, 21, 29; [2002] 2 AC 185, 193.

45 Lep Air Services Ltd v Rolloswin Investments Ltd [1973] AC 331, 354–55; Johnson v Agnew [1980] AC 367, 397; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844, 849; Hurst v Bryk [2002] 2 AC 185, 193, 199. In Australia, McDonald v Dennys Lascelles Limited (1933) 48 CLR 457, 476–78. In Singapore, Lim Lay Bee v Allgreen Properties Ltd [1999] 1 SLR 471 (CA) 480–83.

46 Hinton v Sparkes (1868) LR 3 CP 161; cf in Malaysia, Morello Sdn Bhd v Jaques (International) Sdn Bhd [1995] 1 MLJ 577 (Fed Ct). A deposit paid by a rescinding vendor is repayable upon rescission ab ini-tio: Swindle v Knibb (1929) 29 St Rep NSW 325, 328–29 (Harvey CJ, In Eq).

47 Newfoundland Government v Newfoundland Railway Co (1888) 13 App Cas 199, 207; Brooks v Bernstein [1909] 1 KB 98, 102 (instalment under a hire purchase contract).

48 Dies v British and International Mining and Finance Corporation Limited [1939] 1 KB 724, 743; Baltic Shipping Company v Dillon (1992) 176 CLR 344, 352–53, 391. See further J Beatson, The Use and Abuse of Unjust Enrichment: Essays on the Law of Restitution (1991) 45–77; E Peel, Treitel: The Law of Contract (13th edn, 2011) [21-001]–[21-015].

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whether the party seeking to enforce the obligation is in breach. A central distinction is between payments on account of a lump sum price and for discrete items of perfor-mance. The question often turns on issues of construction and may be finely balanced.49 Provisions intended to survive termination, such as liquidated damages clauses, like-wise continue in force following termination de futuro.50 In contrast, unconditionally accrued obligations dissolve upon termination ab initio, and provisions intended to survive termination will likewise dissolve, unless they fall within one of the exceptions considered earlier.

In some cases money and property will be conditionally transferred under a contract so that there is upon termination de futuro a contractual obligation to repay or return it.51 These contractual rights are activated upon termination for breach. In contrast, termination ab initio dissolves them.

Rights to contractual damages survive termination for breach or frustration. Both parties remain liable to pay damages for any prior breaches, and where the contract is terminated for breach the defaulting party is also obliged to pay damages to compensate for the other party’s loss of the bargain.52 In contrast, all rights to damages for breach of contract are extinguished by termination ab initio.

(4) Termination ab initio and de futuro: rights to restitution

The rights to the restitution of benefits conferred under a contract terminated ab initio and de futuro are materially different. Property, money and services will each be considered separately.

Property transferred

Title to property transferred or created53 pursuant to a contract is generally not revested upon termination for breach,54 whereas this is a central effect of rescission. An exception is the purchaser who lawfully rejects non-conforming goods after title has passed to him; in that case title to the goods revests in the vendor upon the rejection.55 However, although this situation resembles rescission, it differs insofar as termination is de futuro only, so that

49 See for instance the disagreement in Hyundai Heavy Industries Co Ltd v Papadopolous [1980] 1 WLR 1129 (HL) 1137, 1142, 1150, 1152, 1153 (instalments under a ship-building contract), and the different analyses in Hurst v Bryk [1999] Ch 1; [2002] 2 AC 185 (partner’s liabilities).

50 Heyman v Darwins Ltd [1942] AC 356, 374, 375, 398; Hurst v Bryk [1999] Ch 1, 22; also AM Shea, ‘Discharge for Performance of Contracts by Failure of Condition’ (1979) 42 MLR 623, 642–44; E Peel, Treitel: The Law of Contract (13th edn, 2011) [18-013].

51 McDonald v Dennys Lascelles Limited (1933) 48 CLR 457, 477; Dies v British and International Mining and Finance Corporation Limited [1939] 1 KB 724, 744; Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 (HL) 589.

52 Hurst v Bryk [1999] Ch 1, 21–22; [2002] 2 AC 185, 193–94.53 As in the case of a share issue or lease.54 Total Oil Great Britain Ltd v Thompson Garages (Biggin Hill) Ltd [1972] 1 QB 318 (CA) 324 (accepted

repudiation of supply agreement did not extinguish demise of service station where agreement and demise part of one transaction); Hurst v Bryk [1999] Ch 1 (CA) 14, 26; also [2002] 2 AC 185, 199 (partner’s interest in lease not divested upon his termination of the partnership agreement).

55 Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459, 487; Rosenthal and Sons Ltd v Esmail [1965] 1 WLR 1117, 1131; Berger and Co Inc v Gill & Dufus SA [1984] 1 AC 382, 395; Tradax Export SA v European Grain & Shipping Ltd [1983] 2 Lloyd’s Rep 100, 107. See also Head v Tattersall (1871) LR 7 Ex 7; JN Adams, ‘Sale or Return Contracts: Shedding a Little Light’ (1998) 61 MLR 432.

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in addition to a right to recover the price paid,56 the purchaser can claim damages for con-sequential losses caused by the seller’s breach.57

Rationale

It is often said that title is revested upon rescission precisely because the contract is term-inated ab initio.58 But this is not supported by the cases, and is difficult to reconcile with principle. That title to property is returned when a transaction is rescinded for fraud or other sufficient cause was clear from at least the seventeenth century in the courts of Chancery, and by the middle of the nineteenth at common law. At neither point had the law developed the concept of termination ab initio, or drawn a distinc-tion with termination de futuro.59 Nor is there support in modern authority for the proposition that title revests upon rescission because the contract is extinguished from the beginning.

The notion that title revests because the contract is extinguished ab initio is also dif-ficult to reconcile with principle, because it does not fit with various features of rescis-sion. Title will revest upon rescission whether it initially passed by force of the contract, or by some collateral event, such as delivery or registration.60 Rescission recovers title from a subsequent purchaser taking with notice of the relevant conduct, even though the contract with that subsequent purchaser remains in place and is enforceable.61 Title to property gifted by delivery or other conduct is recoverable if the gift is induced by a relevant vitiating circumstance, notwithstanding that there is no contract to rescind.62 Rescission is also available so as to revest or extinguish property even though the contract has been fully performed on both sides, so that there is in substance no contract left to be avoided.63 Conversely, if some exceptional event such as new legislation or the operation of the rule in Pigot’s case caused a contract to become void, there is no reason to think that this would cause a revesting of title to property that has been transferred under the contract.64

Instead, title to property is recovered upon rescission because the fraud, undue influence, or other factor that makes the parties’ contractual rights and obligations liable to be extin-guished ab initio, also itself renders defeasible title to any property that has been transferred

56 Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459, 475.57 Millar’s Machinery Company Limited v David Way and Son (1935) 15 Com Cas 204. See also Sale of

Goods Act 1979 s 48(3), (4); RV Ward Ltd v Bignall [1967] 1 QB 534 (CA); M Kershaw, ‘Seller and Buyer in Possession’ in N Palmer and E McKendrick (eds), Interests in Goods (2nd edn, 1998) 329.

58 This is, for instance, the premise of the argument in W Swadling, ‘Rescission, Property, and the Common Law’ (2005) 121 LQR 123. See also B Häcker, ‘Rescission and Third Party Rights’ [2006] 14 RLR 21, 23; B Häcker, ‘Rescission of Contract and Revesting of Title: A Reply to Mr Swadling’ [2006] 14 RLR 106; D Friedmann, ‘Reversible Transfers—The Two Categories’ [2003] 11 RLR 1, 3–5 (money). Also, DJ Meikle, ‘Partial Rescission—Removing the Restitution from a Contractual Doctrine’ (2003) 19 JCL 40, 56–57.

59 See Chap 3, paras [3.15], [3.30]–[3.32], [3.38].60 See Chap 14, para [14.6] and Chap 15, para [15.5].61 See Chap 21, para [21.42].62 See Chap 29, paras [29.36]–[29.39]. Also, D Fox, Property Rights in Money (2008) [6.15]–[6.16].63 Eg Killick v Roberts [1991] 1 WLR 1146 (CA) 1150.64 Pigot’s case (1614) 11 Co Rep 26b, 27a; 77 ER 1177, 1178, explained A Beehag, ‘Unilateral Alteration

to Mortgage Documents’ (1997) 8 J of Banking and Finance 289. Contrast money paid, which might be recoverable for a total failure of consideration: Goss v Chilcott [1996] AC 788 (PC—NZ).

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pursuant to that contract.65 The title is infected by the transferor’s imperfect consent.66 Extinction of the contract is simply a condition to the recovery of title, in that the law regards the contract’s continuing existence as inconsistent with title revesting.67 But it nei-ther requires nor implies that title should revest.

The importance of drawing a distinction between the avoidance ab initio of contractual rights and obligations upon the rescission of a contract, and the revesting of title in assets transferred pursuant to it, has been underlined and explored in the important work of Birke Häcker.68

Money paid

A personal claim to the recovery of money paid under a voidable contract always arises upon rescission. On the other hand, it will generally only arise following the termination of a contract de futuro if the contract so provides, the consideration for the payment has totally failed, or if the parties’ relationship is such that an equitable obligation to account arises, as upon the termination of a contract of agency or partnership.

Services rendered

A claim to payment in respect of services rendered also usually arises upon rescission, but is rarely imposed following the termination of a contract de futuro. Unless the contract requires payment for work done prior to termination, a claim for a quantum meruit must be made out, and that is difficult where a contract is terminated for breach.69 The rights of the service provider are generally to be found in the contract, not a restitutionary claim arising outside it.70

65 This view appears to be accepted in A Lodder, Enrichment in the Law of Unjust Enrichment and Restitution (2012) 132. Also, B Häcker, Consequences of Impaired Consent Transfers (2013) 211 (‘the identical impairment was liable to infect both contract and conveyance’). Chap V of this work provides a sustained and comparative analysis of the point in the context of German law notions of the ‘abstraction’ between contract and conveyance. For the argument applied to personal rights to restitution following rescission, A Burrows, A Restatement of the English Law of Unjust Enrichment (2012) 162.

66 Cf also, B Häcker, Consequences of Impaired Consent Transfers (2013) 154 arguing that the right to recover property on rescission ‘is founded on the transferor’s ability to revoke his defective consent to a conveyance either at common law or in equity’, leading to a ‘generalised power model’ of proprietary claims upon rescission (163, 171, 199, 211); Restatement (Third) of Restitution vol 1, p 164 (2011) ‘Where consent is defective for any of the reasons addressed in this Topic, the resulting transfer lacks an adequate legal basis. This means that it is ineffective to work a definitive alteration in property rights between the owner and transferee’; see also, vol 1, p 45.

67 But cf B Häcker, ‘Rescission and Third Party Rights’ [2006] RLR 1, 3–4; D Fox, Property Rights in Money (2008) [6.17]–[6.18]; also Chap 20, paras [20.19]–[20.20].

68 B Häcker, ‘Rescission and Third Party Rights’ [2006] 14 RLR 21, 23; B Häcker, ‘Rescission of Contract and Revesting of Title: A Reply to Mr Swadling’ [2006] 14 RLR 106; B Häcker, ‘Proprietary Restitution after Impaired Consent Transfers: A Generalised Power Model’ (2009) CLJ 324; B Häcker, Consequences of Impaired Consent Transfers (2013) 49–50, 125–59, 196–200, 211, 324–25. Cf A Lodder, Enrichment in the Law of Unjust Enrichment and Restitution (2012) 132.

69 For examples of successful claims: Planche v Colburn (1831) 8 Bing 14, 131 ER 305 (repudiation); Pavey & Matthews Pty Ltd v Paul (1986) 162 CLR 221 (contract unenforceable by statute).

70 Taylor v Motability Finance Ltd [2004] EWHC 2619; see also E Peel, Treitel: The Law of Contract (13th edn, 2011) [17-041]–[17-046], [22-019], [22-022], [22-027]; C Mitchell et al, Goff and Jones: The Law of Unjust Enrichment (8th edn, 2011) [3-23], [3-53].

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(5) Terminology

The term ‘rescission’ is often used to refer both to the extinction of a voidable contract ab initio, and to its termination de futuro for breach, particularly where the breach consists of a repudia-tion. This leads to confusion. Williston underlined the problem more than 100 years ago,71 and his point has been repeated since.72 Although it has been said that ‘rescission’ should be reserved for termination ab initio,73 it continues to be used indiscriminately.74

This current practice follows a long habit. The term ‘rescission’ has been used to describe the discharge of a contract for post-contractual breach, or for a pre-contractual misrepresenta-tion, since at least 1800.75 This was probably underpinned by the late arrival of the distinction between termination de futuro and ab initio. Further, as a matter of language, although the word ‘rescission’ and ‘rescind’ combine re- (back) and scindere (‘to cut or tear asunder’)76 the combination can mean two different things. It may mean to cut off, and also to annul or abrogate.77 The former connotes a prospective cutting off; the latter a retrospective annulment.

71 ‘[W] ords have their importance. If wrongly used, wrong ideas are sure to follow, and wrong decisions follow wrong ideas. It is a source of serious confusion in the cases that a contract is frequently spoken of as ‘rescinded’. . . when in truth one party to the contract has merely exercised his right to refuse to perform because of the wrongful conduct of the other party’: S Williston, ‘Repudiation of Contracts’ (1901) 14 Harv LR 421, 425.

72 Mersey Steel and Iron Co v Naylor Benzon & Co (1882) 9 QBD 648, 671 (‘A fallacy may possibly lurk in use of the word “rescission” ’); Johnson v Agnew [1980] AC 367, 392–93; Hurst v Bryk [2002] 2 AC 185, 194 (‘The failure to distinguish between discharge by breach and rescission ab initio has led many courts astray and continues to do so’). Also, Hunt v Hyde [1976] 2 NZLR 453, 457. For other judicial discussion of the meaning of ‘rescind’, Mussen v Van Diemen’s Land Co [1938] Ch 253, 260; Horsler v Zorro [1975] 1 Ch 302, 310–11; Buckland v Farmar and Moody [1979] 1 WLR 220 (CA) 231–32, 237; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844; Munchies Management Pty Ltd v Belpario (1988) 58 FCR 274, 287. For comment in the literature, A Bate, ‘Rescission’ [1955] Conv 116; M Albery, ‘Mr Cyprian Williams’ Great Heresy’ (1975) 91 LQR 337, 342, 343, 351, 355–56; F Dawson, ‘Rescission and Damages’ (1976) 39 MLR 214, 217; AM Shea, ‘Discharge for Performance of Contracts by Failure of Condition’ (1979) 42 MLR 623, 626–30, 634; RP Meagher, D Heydon, and M Leeming, Equity Doctrines and Remedies (4th edn, 2002) [24-005]–[24-025]; E Peel, Treitel: The Law of Contract (13th edn, 2011) [9-081], [9-082].

73 PBH Birks, Unjust Enrichment (2nd edn, 2005) 299. Also, E Peel, Treitel: The Law of Contract (13th edn, 2011) [9-082], [18-001] preferring ‘termination’ to ‘rescission’ for cases of breach, and in this respect changing the nomenclature in earlier editions: eg GH Treitel, The Law of Contract (11th edn, 2003) 759–60.

74 Eg Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459, 480 (right to reject non-conforming goods ‘a particular form of the right to rescind’); Sale of Goods Act 1979, s 48 (‘rescission’ by unpaid seller); Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 (HL) (‘rescission’ for repudiation). See also A Kull, ‘Restitution as a Remedy for Breach of Contract’ (1994) 67 So Cal LR 1465, 1491 criticizing ‘fastidi-ous objection to’ and ‘exquisite correctness’ in the use of the term rescind by American lawyers, and endorsing it as a term to describe any termination for breach leading to restitutionary claims, and reflected now in the Restatement (Third) of Restitution § 37 and § 54 (2011); discussed at paras [1.10]–[1.13].

75 Eg Grimaldi v White (1802) 4 Esp 95, 96; 170 ER 654, 654 (‘rescind’ for misrepresentation by non-disclosure); Cox v Prentice (1815) 3 M & S 344, 350; 105 ER 641, 643 (‘rescind’ for mistake); Campbell v Fleming (1834) 1 Ad & E 40, 42; 110 ER 1122, 1123 (‘rescind’ for fraud); Grenville v Da Costa (1797) Peake Add Cas 113, 114; 97 ER 213 (‘rescind’ for inability to perform); Ehrensperger v Anderson (1848) 3 Ex 148, 158; 154 ER 793, 158 (‘rescind’ for total refusal to perform). The use of ‘rescind’ to mean termination for repudiation, breach, or fraud is made explicit in Fitt v Cassanet (1842) 4 Man & G 898, 134 ER 369.

76 CT Onions (ed), The Oxford Dictionary of English Etymology (1966) 759 ‘rescind’; JA Simpson and ESC Weiner (eds), The Oxford English Dictionary (2nd edn, 1989) vol 13, 689 ‘rescission’.

77 The Oxford Dictionary of English Etymology (1966) ‘rescind’, ‘rescission’. See also PBH Birks, Unjust Enrichment (2nd edn, 2005) 299: ‘The Latin verb “scindere” was a strong word, with overtones of force, for “to cut” or “to cleave”, and “rescindere” meant “to hack back” or “to hack down” and, by transference, “to cancel” or “to annul”. It is not yet clear exactly how the word entered our law’; CB Morison, Rescission of Contracts: A Treatise on the Principles Governing the Rescission, Discharge, Avoidance and Dissolution of Contracts (1916) 10 ‘the word “rescission” is from the Latin rescissio (Fr rescision), rescindere meaning,

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Even once confined to rescission ab initio, the terms ‘rescind’ and ‘rescission’ can refer to quite different things. The verb ‘rescind’ tends to connote the action of electing to reject a contract or gift. That is an empirical event, the subject of evidence. But ‘rescind’ as well as ‘rescission’ may also denote the legal outcome that may follow that action. In between these two meanings, the words may describe the phenomenon or process by which the outcome is achieved and a voidable transaction is undone. When used in that sense, ‘rescission’ describes the creation and extinction of rights and obligations in a manner adapted to annulling and reversing the legal relations that had formerly obtained, whilst the transaction was intact.78

In some cases the action of electing to rescind does not itself cause the legal process of rescis-sion, while in others it does. Where it is important to separate the act of rescinding from the legal process of rescission, ‘disaffirm’ is better than ‘rescind’.

C. Void and Voidable Contracts

Contracts that are valid until rescinded are conventionally called voidable contracts. The discussion that follows distinguishes voidable contracts from contracts that are void from the start, and also distinguishes voidable contracts from contracts that are ineffective until ratified. It also considers the differences between the right to transfer and to recover benefits under void and voidable contracts.

(1) Void and voidable contracts

Void contracts

Although it is, if read literally, a contradiction in terms, the phrase ‘void contract’ is the conventional label for the situation where two parties intend to agree and, as the case may be, to perform a legally binding contract, but no binding contract in fact comes into being. A variety of factors may have been responsible. There might have been insufficient consen-sus, as for example, where the parties were always at cross-purposes.79 The contract might otherwise be void for mistake at common law,80 as, for example, where its subject matter did not exist.81 A plea of non est factum might be available to one party.82 The agreement may have been ultra vires one of the parties,83 or wholly void because prohibited by statute.84

primarily, to (physically) cut off, cut loose, cut or break down, to cut or tear open, and figuratively, in Roman law, to annul, abrogate, or repeal a law, decree, agreement, etc, and apparently, a personal status’.

78 See also PBH Birks, Unjust Enrichment (2nd edn, 2005) 299–300; R Zimmermann, ‘Restitution after Termination for Breach of Contract in German Law’ [1997] 5 RLR 13, 14; A Lodder, Enrichment in the Law of Unjust Enrichment (2012) 118.

79 Falck v Williams [1900] AC 176 (message confirming one charter understood as referring to another).80 Bell v Lever Bros Ltd [1932] AC 161; Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd

[2003] QB 679 (CA).81 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (salvage agreement for non-existent

tanker).82 Saunders v Anglia Building Society [1971] AC 1004 (claim failed on facts).83 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (swaps ultra vires local council).84 Eg gaming and wagering contracts, under the Gaming Act 1845, s 18 (Lipkin Gorman v Karpnal [1991]

2 AC 548, 577) or oral contracts for the sale of land, under the Law of Property (Miscellaneous Provisions) Act 1989, s 2(1) (Tootal Clothing Ltd v Guinea Properties Management Ltd (1992) 64 P & CR 452 (CA) 455; but cf the Law of Property Act 1925, s 40).

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It is not the case that an agreement comes into being, but is unenforceable, as for lack of a statutory formality or other requirement.85 No contract at all arises.

Voidable contracts

A void contract is quite different from a contract that is validly formed unless and until one of the parties rescinds it ab initio. In that case the contract is binding until rescinded, and the right to rescind provides the only qualification to its enforceability. Contracts of this kind are usually described as ‘voidable’. The contract is valid but is able to be made void by rescinding it.

Void and voidable instruments

Deeds and other instruments executed in order to transfer an interest in property or money, as opposed to evidencing contractual rights and obligations, are also sometimes described as ‘void’. When used in that context, the term void usually connotes that the instrument is of no force and effect: not in the sense that it fails to give rise to binding contractual obli-gations, but in the sense that it is not effective to transfer whatever interest is sought to be conveyed or assigned. It is ‘void’ in that it has no dispositive effect. This may be contrasted with an instrument that is effective to pass property rights, but subject to a right to regain those rights upon rescission. These are also sometimes described as ‘voidable’. The main examples are deeds of gift vitiated by mistake or undue influence.86

(2) Contracts valid until rescinded and contracts ineffective until ratified

Sometimes a void contract may be made valid and binding by one party’s election to ratify it. Most void contracts cannot be resuscitated in this way, and contracts that are void until ratified will for convenience be called ‘ineffective’ contracts. Bargains of this kind are some-times called ‘voidable’ contracts, even though they are in substance the converse of a con-tract that is valid until rescinded. That difference is briefly considered next.

Contracts ineffective until ratified

A contract is ineffective until ratified where neither party is entitled or obliged under it unless and until the agreement is ratified, whereupon it becomes fully binding between the parties. This occurs when an agent concludes a bargain without having the actual or appar-ent authority of his principal to do so. The agreement is unenforceable until ratified by the principal, and the principal is the only party entitled to do so. Once ratified, the contract becomes binding as if the agent had actual authority as at the date he procured the agree-ment.87 The ratification is effective retrospectively, and the contract is binding even if rati-fied after the other party has sought to withdraw,88 and, apparently, such that title passing by force of the contract is deemed to have been conferred retrospectively.89

85 Eg Pavey & Matthews Pty v Paul (1986) 162 CLR 221 (Builders Licensing Act 1971 (NSW)).86 The rescission of deeds of gift are attended by certain special rules, and these are separately considered

in Chap 29.87 See further PG Watts and FMB Reynolds (eds), Bowstead and Reynolds on Agency (19th edn,

2010) [2-047].88 Bolton Partners v Lambert (1889) 41 ChD 295 (CA).89 Lawson (Inspector of Taxes) v Hosemaster Co Ltd [1966] 1 WLR 1300, 1314 (transfer of shares); cf

PG Watts and FMB Reynolds (eds), Bowstead and Reynolds on Agency (19th edn, 2010) [2-094]: ‘Any title

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An agreement of this kind has variously been described as voidable not void,90 not void-able,91 as a transaction that is not a nullity,92 and as one that is not the principal’s contract and is not enforceable.93 It has also been said that ‘there is nothing to avoid or rescind’ because no contract comes into existence,94 but also that a transaction of this kind may be ‘set aside’.95

Contrast with contracts valid until rescinded

Although it has been said that a contract that is ineffective until ratified is ‘voidable’ and may be ‘set aside’, it is ‘voidable’ only in the loose sense that one party has a choice to make it either binding or not binding. But that choice is largely the converse of the choice given to the party entitled to rescind. The choice of the party able to ratify is whether he will take steps to turn an ineffective transaction into a binding contract as from the beginning, or decline to ratify and so leave the agreement without force or effect. The choice of the party entitled to rescind is whether to take steps to extinguish and undo an otherwise valid and binding agreement as from the beginning, or instead to affirm and enforce his existing contractual rights.

In both contexts the party entitled enjoys a defence to claims upon the contract which may be lost by his unilateral act: affirmation in the case of rescission, and ratification in the case of an agent’s unauthorized agreement. But this apparent similarity is also founded on a fundamental difference. In the former case a defence exists because the contract can be set aside as from the beginning, and is lost by affirmation precisely because that extinguishes the entitlement to rescind. In the case of an unauthorized bargain, on the other hand, the contractual defence exists because the bargain is not binding when concluded, and is lost by ratification precisely because that makes it effective as from the beginning.

In addition, a contract valid until rescinded is capable of transferring property, and confers a right to retain other benefits received under it unless and until it is set aside. A contract ineffective until ratified is incapable itself of transferring property rights, and confers no rights to retain benefits received unless and until it is ratified.96

(3) Transfer of title

Whereas no contractual rights or obligations arise where a contract is void, a voidable con-tract is fully effective until rescinded. One consequence of this is that it is more difficult to transfer title to property where a contract is void than it is where the contract is merely voidable.

acquired by P relates back to the moment of ratification’, which appears to mean the moment when the authorization is deemed to have been given.

90 Brook v Hook (1871) LR 6 Exch 89, 99.91 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 521, 533; also Brook v Hook (1871)

LR 6 Exch 89, 96.92 Bolton Partners v Lambert (1889) 41 ChD 295 (CA) 309 (Lindley LJ).93 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246 (CA) 299; Criterion

Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 (HL) 1856.94 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 521; see also 533.95 Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 (HL) 1848.96 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 521.

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Title to property cannot pass pursuant to the terms of a void contract, for the law has denuded those terms of legal force. The disponee must instead, if he is able, found title on acts done by the disponer when performing the apparent contract. Although legal title to money will generally pass where payment is made pursuant to a void contract,97 property in chattels is transferred only if there is a delivery coupled with a sufficient intention that title will pass.98 This latter requirement may not be satisfied in the case of some void con-tracts, and is usually not satisfied where goods are delivered to a fraudster pretending to be someone else. In such a case it has been held that the contract is void and no title passes.99

On the other hand, a contract for the sale of land that is void for lack of writing will not prevent title to that land from passing upon conveyance,100 and registration pursuant to a void contract will generally confer title to registered land.101 But no title can pass if the estate is to be conveyed by deed rather than registration, and the instrument of conveyance is itself void. This is so, for example, when a deed of gift is executed by a donor of impaired mental capacity,102 or where a plea of non est factum is available,103 or where a conveyance of land is attempted other than by deed.104

There are not the same difficulties in transferring rights to assets under a voidable contract. The contract is valid until rescinded. Pending rescission it can transfer rights to money and to other assets as effectively as any other contract. So, for example, in cases where goods are delivered to a fraudster pretending to be someone else, and the fraud renders the contract voidable rather than void, title will generally pass.105 Similarly, where an instrument of transfer is voidable, as in the case of a deed of gift vitiated by a serious unilateral mistake,

97 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 689; Sinclair v Brougham [1924] AC 398, 418; Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] 1 QB 677, 689. See also Norwich Union Fire Insurance Society Ltd v WMH Price Ltd [1934] AC 455 (PC—Aust); Porter v Latec Finance (Qld) Pty Ltd (1964) 111 CLR 177; D Fox, ‘The Transfer of Legal Title to Money’ [1996] RLR 60, 69–70. But no title passes where payments are made from one bank account to another. Rather, the payee comes to own title in a new asset, being the new or larger chose in action represented by the new or increased credit balance in his bank account: R v Preddy [1996] AC 815.

98 Cochrane v Moore (1890) 25 QB 57 (CA), discussed F Pollock, ‘Gifts of Chattels Without Delivery’ (1890) 24 LQR 446, 446–51; see also R v Hinks [2001] 2 AC 241, 266; W Holdsworth, A History of English Law (A Goodhart et al, (eds)) (7th edn, 1956) vol 7, 503–09; and Whittaker v Campbell [1984] 1 QB 318 (Div Ct) 326–27 (no general principle of law that fraud vitiates consent); Shogun Finance v Hudson [2004] 1 AC 919 [6] –[8] (fraud does not itself negative contractual intention).

99 Cundy v Lindsay (1878) 3 App Cas 459, 466, 469, 471 (sale and delivery of handkerchiefs to fraudster); Ingram v Little [1961] 1 QB 31 (CA) (sale and delivery of car to fraudster). But cf C MacMillan ‘Rogues, Swindlers and Cheats: The Development of Mistake of Identity in English Contract Law’ [2005] 64 CLJ 711, 730, which may raise doubts as to whether Cundy v Lindsay offers reliable general guidance as to the intention necessary to pass title when chattels are delivered under a void contract. In Australia, Citibank Ltd v Papandony [2002] NSWCA 375 [64]–[65]; MBF Australia Ltd v Malouf [2008] NSWCA 214 [65]–[72]; Perpetual Trustees Australia Ltd v Heperu Pty Ltd (2009) 76 NSWLR 195 (CA) [71] (no title passes in cheques delivered by victim of fraud where no contract comes into being).

100 Tootal Clothing Ltd v Guinea Properties Management Ltd (1992) 64 P & CR 452 (CA) 455; Law of Property (Miscellaneous Provisions) Act 1989, s 2.

101 Land Registration Act 2002, s 58(1); but cf where the transfer is forged. In the Torrens system, Fraser v Walker [1967] 1 AC 569, Breskvar v Wall (1971) 126 CLR 376. See further E Cook and P O’Connor, ‘Purchaser Liability to Third Parties in The English Land Registration System: A Comparative Perspective’ (2004) 120 LQR 640.

102 Re Beaney Decd [1978] 1 WLR 771 (deed of conveyance void); Chap 29, para [29.09].103 Saunders v Anglia Building Society [1971] AC 1004 (claim failed on the facts).104 Law of Property Act 1925, s 52(1).105 Phillips v Brooks Ltd [1919] 2 KB 243; Lewis v Averay [1972] 1 QB 198 (CA). See also D O’Sullivan,

‘Distributing the Risk of Contract Fraud’ (2001) 117 LQR 381.

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the deed or other instrument is effective according to its terms unless and until set aside by the court.106

(4) Recovery of benefits

There are quite different rights to recover any benefits that may have been conferred in the course of performing void and voidable contracts. Of key importance is the general rule that a contract must first be brought to an end before the law will intervene and impose obliga-tions to return benefits that were transferred pursuant to its terms.

The common law does not impose an obligation to repay sums paid under a contract unless and until the contract is terminated. The rule applies both to contracts that may be rescinded, and to those that may be terminated for breach or frustration.

Although probably first formulated for technical reasons peculiar to the forms of action, as a brake on claims in general assumpsit, and mainly in order to protect defendants,107 the agreed explanation for the rule today is that the contract governs the parties’ rights until it is brought to an end. The obligation to repay that the law imposes is inconsistent with the terms of the contract, so it cannot arise until the contract is ended.108 This thinking has been described as an ‘article of faith’,109 although one questioned by some scholars.110 It also

106 Gibbon v Mitchell [1990] 1 WLR 1304.107 See Chap 3, para [3.25].108 Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] 1 QB 677, 695; Enimont Overseas AG v

RO Jugotanker Zadar (The Olib) [1991] 2 Lloyd’s Rep 108, 118; Dimskal Shipping Co SA v International Transport Workers Federation (The Evia Luck) [1992] 2 AC 152, 165; Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 WLR 161 (HL) 164; SA Smith, ‘Concurrent Liability in Contract and Unjust Enrichment: The Fundamental Breach Requirement’ (1999) 115 LQR 245, 252–53 and J Beatson ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in W Swadling and G Jones (eds), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (1999) 143, 147–50. Contrast Miles v Wakefield Metropolitan DC [1987] AC 539 (principle not applied). In Australia, Baltic Shipping Company v Dillon (1992) 176 CLR 344, 355–56; Electricity Generation Corporation v Woodside Energy Ltd [2013] WASCA 36 [33], [201]–[206] (point referred but not considered on appeal to the High Court, at (2014) 306 ALR 25 [32]); contrast Roxborough v Rothmans of Pall Mall Australia (2001) 208 CLR 516 (principle not applied) (discussed J Beatson and G Virgo, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR 352; PBH Birks, ‘Failure of Consideration and its Place on the Map’ (2002) 2 OUCLJ 1; B Kremer, ‘Restitution and Unconscientiousness: Another View’ (2003) 119 LQR 188; P Jaffey, ‘Failure of Consideration: Roxburgh v Rothmans’ (2003) 66 MLR 284).

109 SA Smith, ‘Concurrent Liability in Contract and Unjust Enrichment: The Fundamental Breach Requirement’ (1999) 115 LQR 245, 253.

110 F Dawson, ‘Rescission and Damages’ (1976) 39 MLR 214, 219; SA Smith, ‘Concurrent Liability in Contract and Unjust Enrichment: The Fundamental Breach Requirement’ (1999) 115 LQR 245, 253–55; J Beatson ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in W Swadling and G Jones (eds), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (1999) 143, 146, 151–57, 169; A Tettenborn, ‘Subsisting Contracts and Failure of Consideration—A Little Scepticism’ [2002] RLR 1. This discussion forms part of a wider literature concerning the relationship between rules of contract law and restitutionary obligations said to derive from unjust enrichment. Egs, S Stoljar, ‘Contract, Gift and Quasi-Contract’ (1959) 3 Sydney LR 33; SD Henderson, ‘Promises Grounded in the Past: The Idea of Unjust Enrichment and the Law of Contracts’ (1971) 57 Virginia LR 1115; JM Perillo, ‘Restitution in a Contractual Context’ (1973) 73 Columbia LR 1208; A Mead, ‘Restitution Within Contract?’ (1991) LS 172; K Barker, ‘Unjust Enrichment: Containing the Beast’ (1995) 15 OJLS 457, 459–63; D Nolan, ‘The Classical Legacy and Modern English Contract Law’ (1996) 59 MLR 603, 610–11; A Skelton, Restitution and Contract (1998); A Kull, ‘Restitution as a Remedy for Breach of Contract’ (1994) 67 So Cal LR 1465; A Kull, ‘Restitution and the Non-Contractual Transfer’ (1997) 11 JCL 93; Restatement (Third) of Restitution § 2(2), and cmt c, vol 1, pp 608–09 (2011). As to German law, R Zimmermann, ‘Restitution after Termination for Breach of Contract in German Law’ [1997] 5 RLR 13.

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applies to obligations imposed by the common law to make payment in respect of services conferred under a contract,111 and even if the contract is unenforceable.112

Despite having been developed by the old common law courts, the rule is now applied to claims to recover money paid under contracts that may be set aside in equity,113 and is treated as generally applicable when money is transferred under a voidable contract.114

The same logic should apply in relation to legal title to property that has passed pursuant to the terms of a voidable contract. Recovering legal title is inconsistent with the terms of the contract, and so can only occur after it is extinguished. This point has, however, received limited attention in the cases.115

The general rule is that the location of equitable title is also to be ascertained by reference to the contract so long as it stands.116 But equitable title differs from legal title because an equitable proprietary interest may attach to money or property transferred under a voidable contract even though the contract is not extinguished at common law. It is sufficient if the transaction has been vitiated on grounds sufficient to generate a proprietary interest, the party asserting the interest elects to disaffirm the contract, and a court order for rescission remains available.117

The position is quite different where money is paid performing a void contract, and may be recovered because paid under a mistake, or because the consideration for it was absent or has failed. In such cases the payee is obliged to refund the sums paid as from the moment of receipt.118 The position is the same where money is otherwise paid over in the mistaken belief that it was due, or by accident.119 In both cases no demand is required before the common law imposes a debt in favour of the payer.120 Similarly, if the provider of services under a void contract has a right to restitution in respect of work done, that right will also generally arise as from the time that the services were provided.121 The position is quite

111 Steven v Bromley & Son [1919] 2 KB 722 (HL) 730; Re Richmond Gate Property Co Ltd [1965] 1 WLR 335, 338, discussed KW Wedderburn, ‘Contractual Rights Under Articles of Association—An Overlooked Principle Illustrated’ (1965) 28 MLR 347–48; AT Denning, ‘Quantum Meruit and the Statute of Frauds’ (1925) 41 LQR 79–80.

112 Pavey & Matthews Pty v Paul (1986) 162 CLR 221, 234–35, 256 (contract unenforceable by statute to be terminated before quantum meruit could be claimed). The position is different if the statute also prohibits claims for a quantum meruit.

113 Cargill v Bower (1878) LR 10 ChD 502, 517–18 ‘so long as the contract stands I could not direct the company to repay to the Plaintiff the money which, if the contract stands, are not properly repayable. He cannot have that money unless the contract is rescinded’ (share issue under fraudulent prospectus); Portman Building Society v Hamlyn Taylor Neck (a firm) [1998] 4 All ER 202 (CA) 208.

114 Eg Re Goldcorp Exchange [1995] 1 AC 74 (PC—NZ) 102.115 Hogan v Healy (1877) 11 IR Ex 119, 121–22; see also Clough v London and North Western Railway Co

(1871) LR 7 Ex 26, 34, 36 (recovery of title co-incident with extinction of contract).116 Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371, 389.117 See Chap 16, paras [16.21] and [16.22].118 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 389 (payment under

clause void for illegality); Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 717; [1994] 1 WLR 938 (CA) 943, 955 (contracts void as ultra vires). But cf where the factors causing the contract to be void also prevent any claim to restitution; as to which, E Peel,Treitel: The Law of Contract (13th edn, 2011) [22-013]–[22-018].

119 Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] 1 QB 677, 695; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 389; Fuller v Happy Shopper Markets Ltd [2001] 2 Lloyd’s Rep 49, 53–54.

120 Fuller v Happy Shopper Markets Ltd [2001] 2 Lloyd’s Rep 49, 54.121 Craven-Ellis v Canons Ltd [1936] 2 KB 403 (CA) 409–12.

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different when benefits are transferred under a voidable contract. As has been seen, no right to restitution can arise unless and until the voidable contract is set aside, save insofar as an equitable proprietary interest may be crystallized when the innocent party elects to disaf-firm the transaction.

The final principal difference between these two contexts is the fragility of the right to restitution. Personal restitutionary rights arising in the context of void contracts are lost pro tanto to the extent that the recipient enjoys a defence of change of position. There is no defence of this kind when benefits are conferred under a voidable contract. Instead, the right to restitution is lost entirely whenever any of the various bars to rescission are engaged. The right to restitution is therefore significantly more fragile where benefits are conferred under a voidable rather than a void contract.

D. Rescission and Transactions Ineffective in Equity

(1) Introduction

The general rule is that title to property passes under a voidable contract or gift and is recov-erable if and when rescission occurs. In some circumstances, however, equity immediately fetches back beneficial title to assets transferred under a contract or gift, compelling the recipient to hold the title obtained on trust for the transferor as from the moment of its receipt. In cases of this kind equity makes the disposition of the asset ineffective as from the start. The transaction is not voidable, and the principles of rescission do not apply. A trans-action may be ineffective in equity if the contract through which it was made is binding at law, or if the contract was wholly void at law. There is no symmetry between the incidence of void contracts and of transactions ineffective in equity.

The difference between voidable transactions and transactions ineffective in equity is one of practical importance. In the case of a voidable transaction, the availability of a proprietary claim is more fragile because it is subject to all of the bars to rescission, which do not inhibit the right to assert a proprietary interest when a transaction is ineffective in equity. Indeed, it has been said that requiring rescission is a means of ensuring that proper account is taken of the rights of third parties, and to prevent simultaneous recovery under the contract and by a proprietary remedy.122

Despite the practical importance of the distinction between a voidable transaction, and one rendered ineffective in equity from the outset, there is often some confusion as to which dispositions fall into which category of case. This is fuelled by the different senses in which the term ‘voidable’ is used.

Different meanings of ‘voidable’

The labels ‘void’ and ‘voidable’ have well-established meanings in the law of contract, where they describe the status of a contract or purported contract.123 But they are also used to describe the status or effect in equity of a purported disposition of money or property,

122 Robins v Incentive Dynamics Pty Ltd (2003) 175 FLR 286 (NSWCA) 302–03 per Giles JA, referred to with approval Grimaldi v Chameleon Mining NL (2012) 200 FCR 296 (Full Ct) 365.

123 See paras [1.36] and [1.37].

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whether under a contract or not,124 including by exercise of a power of appointment.125 The focus of the language is on the efficacy of a transfer of assets. In that context, the terms void and voidable have a less clearly defined meaning.

When employed with this focus on dispositions rather than agreements, the term voidable is sometimes used to describe transfers that are ineffective in equity as from the outset. This habit is evident in some cases concerned with the self-dealing rule.126 American law-yers similarly speak of the rescission of voidable sales induced by fraud or other vitiating factors, even though (in contrast with English law) a constructive trust arises from the moment the sale is completed, so that the disposition is ineffective in equity as from the beginning.127 When the term voidable is used in this sense, it focuses on legal rather than beneficial title.128

The fact that a transaction may be described as voidable therefore does not always provide reliable guidance as to whether the principles of rescission apply.129 Those principles only apply where beneficial title passes pursuant to the transaction, but subject to an entitle-ment in the transferor to recover it by rescinding. The principles do not apply where ben-eficial title is immediately divested, such that the disposition is ineffective in equity from the start.

Rescission and the ratification of transactions ineffective in equity

In the case of some transactions that are ineffective in equity in the manner just described, the beneficial owner is permitted to ratify the transaction, and thereby pass equitable title to the recipient of the relevant asset. So, for example, a company may ratify an unauthorized transfer made by a director,130 and in so doing will make effective the purported disposition of its assets. A cestui que trust is also given separate and specific rights of election against a defaulting trustee who has disposed of trust property without authority. These are con-ferred to ensure that the fiduciary cannot profit from his use of the trust property.131

Although transactions that are ineffective but that may be ratified are, confusingly, some-times called voidable transactions, this is in fact the converse of rescission. The right is to elect to divest an existing beneficial interest, whereas rescission involves regaining a title lost or obtaining a new beneficial interest in traceable substitutes. The rules regulating the one species of transaction do not apply to the other. Likewise the rights of election of a cestui que trust are wholly inapposite outside the fiduciary context, and should be regarded as having limited if any relevance to the right to rescind.132

124 Sieff v Fox [2005] 1 WLR 3811, 3837; Clark v Cutland [2004] 1 WLR 783 (CA) 792.125 Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409, 419–20.126 See para [1.74].127 AW Scott and WA Fratcher, The Law of Trusts (5th edn, 2013) vol 1, [3.4.1], [4.6.1]–[4.6.4]; Restatement

(First) of Restitution § 163 and § 167 (1937) (and commentary thereto). Also, Restatement (Third) of Restitution § 13 cmt d (2011).

128 PBH Birks, Unjust Enrichment (2nd edn, 2005) 184.129 Cf Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432, 458 (Windeyer J).130 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 533 (Colman J); (cf 521–22 where

Nourse LJ characterizes the issue as one of affirmation).131 Bostock v Blakeney (1789) 2 Bro CC 654, 656; 29 ER 362 (choice between personal claims); Foskett v

McKeown [2001] 1 AC 102, 130–31 (right to proprietary claim to substitute).132 But cf RC Nolan, ‘Dispositions Involving Fiduciaries: The Equity to Rescind and the Resulting Trust’

in P Birks and R Rose (eds), Restitution and Equity (2000) chap 7.

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Overview

This Part D outlines the main classes of case in which dispositions of money and property are rendered ineffective in equity as from the start. These classes of case fall outside the scope of the law of rescission, and are treated here for the purpose of better defining the boundaries of the subject.

Transactions ineffective in equity are divided into five categories:

1. contracts where the person claiming an interest is not a party;2. contracts where he is a party to the impugned transaction;3. contracts affected by bribery, which may fall into either of those two categories;4. apparent gifts made ineffective by the imposition of a resulting trust; and5. other cases.

(2) Where the claimant is not a party to the impugned transaction

Irrespective of the authority granted by the trust instrument, a trustee’s title to the trust estate confers a power to deal with the beneficiaries’ property, and derives from his status as owner.133 Where the disposition is unauthorized and a breach of trust, the beneficiary may assert his existing beneficial interest in the trust asset or its traceable proceeds in the hands of all recipients save a bona fide purchaser for value without notice, or one taking from him.134 If the trustee sells, mortgages, lends, or otherwise disposes of the trust assets to a person who gives value, but takes with notice of the breach of trust, the disposition is ineffective in equity. The recipient holds the assets for the benefit of the cestui que trust.135 The position is the same if the transfer is made to a volunteer, albeit the duty to account is different if the transferee takes without notice.136 The same principle applies to fiduciaries other than private trustees who enjoy a power to dispose of their principal’s property in their own name.137

Where the fiduciary’s contract is within the letter of his mandate, but unauthorized because it involves a breach of his duty of loyalty, the contract may be valid and binding at common law, but any disposition of assets made under it will be ineffective in equity.

The distinction between a voidable transfer, and the transfer of assets rendered ineffective in equity, was recently underlined in Independent Trustee Services Ltd v GP Noble Trustees Ltd.138 Lloyds LJ there explained that, in the former case, full legal and beneficial title passes, subject only to the transferor’s equity to rescind, whereas in the case of a trustee’s unauthorized disposition of trust assets (to a person other than a bona fide purchaser for

133 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246 (CA) 303.134 Foskett v McKeown [2001] 1 AC 102, 108–09, 130. But beneficial title may be asserted against a

trustee who reacquires the misapplied trust property from or via a bona fide purchaser for value without notice: Gordon v Holland (1913) 10 DLR 734 (PC—Canada) 743; Re Stapleford Colliery Company (1879) 14 ChD 432, 445.

135 For a re-analysis, RC Nolan, ‘Equitable Property’ (2006) 122 LQR 232, 251, 259–60, 264–65. See also D Fox, ‘Overreaching’ in P Birks and A Pretto (eds), Breach of Trust (2002) chap 4.

136 Independent Trustee Services Ltd v GP Noble Trustees Ltd [2013] Ch 91 (CA) 122–23.137 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 521; J Mowbray et al (eds), Lewin

on Trusts (18th edn, 2008) [41-11], [41-50].138 [2013] Ch 91 (CA).

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value) the cestui que trust ‘have more than a “mere equity”; they still own their beneficial interests in the trust property unaffected by the disposition made without authority under the trust’.139

(3) Where the claimant is a party to the impugned transaction

The fair-dealing rule

The position described is to be contrasted with the case where a trustee seeks to purchase or otherwise acquire an interest in the trust estate from his beneficiary. The beneficiary is said to be entitled to have the sale ‘set aside’ if the trustee cannot show that the transaction com-plied with the requirements of the fair-dealing rule.140 It is generally thought that a contract and disposition of this kind is valid until rescinded rather than ineffective until ratified. That appears to have been confirmed in Hill v Langley,141 where the Court of Appeal seemed to accept the trial judge’s conclusion that he had a discretion whether or not to set the sale aside. Where a beneficial interest is purchased contrary to the fair-dealing rule, it therefore appears that title passes to the trustee, but defeasibly, subject to the beneficiaries’ right to regain it by rescinding, and therefore subject to the ordinary bars to rescission.

The rule is more clearly established when a fiduciary who is not a trustee purchases or otherwise acquires assets from his principal under a contract vitiated by breach of fiduci-ary duty. Beneficial title in property passes, but may be regained if and when the principal rescinds.142

The self-dealing rule

Attempted transactions between a trustee and his trust, of which attempted purchases of trust assets are the most common example, are governed by the self-dealing rule.143 No mat-ter how fair the terms may be, self-dealing transactions are prohibited unless specifically authorized by the beneficiaries, by the court, by the terms of the trust, or by statute. This rule is designed to protect the beneficiaries against conflicts of interest.144 The rule applies not only to conventional trusts, but also to company directors and indeed whenever a fidu-ciary holds assets in a custodial capacity.

139 Independent Trustee Services Ltd v GP Noble Trustees Ltd [2013] Ch 91 (CA) 128.140 See the authorities reviewed in Plowright v Lambert (1885) 52 LT 646; Tito v Waddell (No 2) [1977]

Ch 106, 241.141 (CA 29 January 1988) (rescission of purchase by trustee of beneficiary’s interest under will). The court

also seemed to assume that rescission could be barred if restitutio in integrum was impossible, and contem-plated the transaction being set aside on the ordinary terms as to counter-restitution.

142 Daly v Sydney Stock Exchange Limited (1985) 160 CLR 371, 387–90; approved by Millett J in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 735, albeit in the context of fraud rather than breach of fiduci-ary duty; Greater Pacific Investments Pty Ltd v Australian National Industries Ltd (1996) 39 NSWLR 143 (CA) 153; Maguire v Makaronis (1998) 188 CLR 449; Johnson v EBS Pensioner Trustees Ltd (ChD, 8 March 2001); [2002] Lloyd’s Rep PN 309 (CA). There is Australian authority that the court has a discretion as to whether a proprietary interest will be granted where a fiduciary’s contract with his principal is vitiated by breach of fiduciary duty: Robins v Incentive Dynamics Pty Ltd (2003) 175 FLR 286 (NSWCA) 301; also RP Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4th edn, 2002) [5-250]; but cf [5-270]; see also Chap 16, paras [16.63]–[16.64].

143 Tito v Waddell (No 2) [1977] 1 Ch 106, 224–25, 247–49.144 See M Conaglen, ‘A Re-appraisal of the Fiduciary Self-dealing and Fair-dealing Rules’ [2006] CLJ 366.

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A trustee who circumvents the rule requiring that every contract has two parties and effects a valid contract and conveyance to himself or his nominee must still reckon with the limits of his authority. Trustees and other custodial fiduciaries ordinarily lack authority to sell trust property to themselves or related parties. The first part of this proposition was clearly expressed by Lindley LJ in Farrar v Farrar’s Limited: ‘a power of sale does not authorise the donee of the power to take the property subject to it at a price fixed by himself, even although such price be the full value of the property.’145 To this Millett LJ added in Ingram v IRC that ‘A trustee’s power of sale does not authorize the trustee to sell the trust property except to someone with whom he can deal at arm’s length’.146 These propositions constitute the self-dealing rule.

A number of authorities indicate that an attempted purchase by a trustee is voidable at the option of any of the beneficiaries.147 This might suggest that the beneficiaries’ remedy is rescission. The Australian judge McPherson J (writing extra-judicially) points, however, to a parallel line suggesting that such purchases are in fact void or ineffective in equity because the trustee cannot unilaterally extinguish the beneficial interests.148 The idea that the sale is voidable and liable to be set aside appears to have been used in some of the other cases consistently with McPherson’s view to mean nothing more than that the conveyance can be set aside and the property recovered, or that the beneficiaries may elect whether to treat the purported sale as void or else to ratify it and keep the proceeds.

In principle McPherson’s view seems right. There can be no doubt that a simple transfer of property held in the name of the trust to the trustee personally without the consent of the beneficiaries has no effect upon their beneficial title.149 It is difficult to see that the position is any different if at the same time the trustee deposits a sum of his own money to the trust account; or dresses the transaction up as a formal sale; or purchases from himself at a public auction. Even if a valid contract or conveyance can be effected, the purported sale in each of these cases should be ineffective because the trustee’s power of sale does not authorize a sale to himself or his nominee.

Whatever doubts there may have been about this were put to rest by the Court of Appeal’s decision in JJ Harrison (Properties) Ltd v Harrison.150 That case involved a company director who purchased a plot of land from the company without disclosing to the other directors a qualification to the valuation and the existence of a planning application. Following the sale the planning application was successful and the director soon resold the land for more

145 (1888) 40 ChD 395 (CA) 401.146 [1997] 4 All ER 395 (CA) 425, on appeal [2000] 1 AC 293, 305, 310.147 Campbell v Walker (1800) 5 Ves Jun 678, 680; 31 ER 801; Re Daly (1907) 39 SCR 122; Holder v Holder

[1968] 1 Ch 353 (CA) 398; Re Sherman [1954] Ch 653; Ingram v IRC [1997] 4 All ER 395 (CA) 424; [2000] 1 AC 293; see also Guinness plc v Saunders [1990] 2 AC 663, 697–98. The issue was discussed in passing by the High Court of Australia in Clay v Clay (2001) 202 CLR 410. The court said the transaction was voidable but does not appear to have considered the question closed.

148 BH McPherson, ‘Self-Dealing Trustees’ in AJ Oakley (ed), Trends in Contemporary Trust Law (1996) chap 6, referring in particular to Franks v Bolans (1868) 3 Chap App 717, 718–19; Denton v Donner (1856) 23 Beav 285, 290; 53 ER 112; Williams v Scott [1900] AC 499 (PC). To this may be added Morse v Royal (1806) 12 Ves Jun 355, 372; 33 ER 134 and Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409, 421, where Lightman J said that the self-dealing rule is an exception to the general rule that ‘a decision challenged on the ground of breach of fiduciary duty is voidable and not void’.

149 Glennon v Federal Commissioner of Taxation (1927) 127 CLR 503, 511–12.150 [2002] 1 BCLC 162 (CA).

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than ten times what he had paid. Rix LJ held that by operation of the self-dealing rule the director acquired the land subject to a constructive trust in the company’s favour. He said that: ‘a director, on appointment to that office, assumes the duties of a trustee in relation to the company’s property. If, thereafter, he takes possession of that property, his possession “is coloured from the first by the trust and confidence by means of which he obtained it”.’151 On this basis the remedy to recover the asset is simply an action to recover trust property.152 This is quite different from rescission, which presupposes that the defendant has received undivided title subject only to the claimant’s equity to recover title upon rescission.

Contracts procured by unauthorized agents

Where an agent sells or otherwise disposes of his principal’s assets without actual or appar-ent authority and in breach of fiduciary duty owed to the principal, the other party to the contract does not obtain beneficial title if he is sufficiently aware of the breach of duty, or takes as a volunteer. As noted earlier, on the contractual plane, when this occurs the agree-ment will be ineffective until ratified.153

Application of the principle where directors misuse powers to alienate company propertyThe principle just noted is well established in the case of company directors who misuse their powers to alienate company assets to those aware that the powers have been misused, so that the director lacks both actual and apparent authority.154 The disposition is denied effect in equity. The contractual counterparty is required to hold the assets received on trust for the company as from the moment of receipt.155 The same principle applies if the recipient takes as a volunteer from the company without notice.156 An Australian court has held that in such a case the transaction is only voidable in equity,157 but that appears to be wrong in principle.158 The transaction will be voidable if the counterparty gives value and takes without notice of the director’s breach of duty.159 But if he takes with notice or is a volunteer, the property dis-posed of should be held on trust for the company as from the moment of receipt.160

151 JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 (CA) [29].152 JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 (CA) [39].153 Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 (HL); para [1.40].154 In such a case, s 40(1) of the Companies Act 2006 will have no application. See also s 41(2) of the

Companies Act 2006 (transactions with directors or their associates voidable if authority for it depends upon the protection to outsiders conferred by s 40(1)).

155 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246 (CA) 298, 303, 306–07 (moneys paid pursuant to a guarantee in improper exercise of directors’ power); Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 521, 533 (moneys paid under a loan pursuant to a fraud). It has been said that the transaction is in such a case ‘void’ rather than ‘voidable’: GHML Trading Limited v Maroo [2012] EWHC 61 (Ch) [171].

156 Clark v Cutland [2004] 1 WLR 783 (CA) 792 (unauthorized payments made by company to pension trustee taking as a volunteer).

157 Grimaldi v Chameleon Mining NL (2012) 200 FCR 296 (Full Ct) [254].158 Unless, perhaps, it could be said that, although the director was not acting for proper purposes,

nevertheless the transaction was within his authority, and gave rise to a binding contract at common law, rather than to a contract ineffective until ratified by the company. See also Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557 (NSWCA) 586–88 (special leave to appeal refused [2008] HCA Trans 132); Commonwealth v Davis Samuel Pty Ltd (No 7) (2013) ACSR 258 (ACT Sup Ct) [1553]–[1565].

159 A proposition confirmed by Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 142, cited by the Full Federal Court in Grimaldi v Chameleon Mining NL (2012) 200 FCR 296 (Full Ct) [254].

160 For discussion in the context of a claim for specific performance, ANZ Executors & Trustee Company Limited v Qintex Australia (receivers and managers appointed) [1991] 2 Qd R 360 (CA) (covenant to pro-cure subsidiary companies to execute a guarantee where group became insolvent). For the principal’s rights

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Identity fraud

Just as in certain circumstances legal title to goods will not pass where a contract is rendered void by the buyer’s fraud as to his identity,161 so a similar principle may sometimes apply in relation to equitable title. In Collings v Lee162 the Court of Appeal held that beneficial title in the Collings’ home had not passed to their buyer, one ‘Styles’, in circumstances where Styles was in fact an alias used by the fraudster Lee, whom Mr and Mrs Collings had retained as their agent to sell the property.

Would the result have been the same had the fraudster not been retained as the Collings’ agent, which had the effect that the sale and Lee’s subsequent registration as owner was affected by breach of fiduciary duty and absence of authority? Nourse LJ, with whom the other members of the court agreed, emphasized that the critical reason why the transfer to ‘Styles’ was ineffective rather than merely voidable was that Mr and Mrs Collings had never intended to transfer ownership to him:

The rationale of the principle, as it applies to a transfer of property, is that even where the transfer is obtained by fraudulent misrepresentation, the transferor nevertheless intends that the whole legal and beneficial ownership in the property shall pass to the transferee. But that was not this case. Mr and Mrs Collings did not intend to transfer the property to the first defendant and they did not intend to transfer it for no consideration. The first defendant acquired the property without their knowledge and consent and in breach of his fiduciary duty to them. The equitable interest remained vested in Mr and Mrs Collings.163

One view of this reasoning is that it implies that an immediate revesting of beneficial title could have occurred absent any breach of fiduciary duty, and absent the fact that the sale involved an agent’s unauthorized dealings. The key point was the absence of intention to transfer beneficial title. This alignment of voidable transfers with impaired intention, and wholly ineffective transfers with no intention, finds some support in the reasoning in Twinsectra Limited v Yardley.164 But the preferable analysis is that this alignment merely expresses the rationale for specific rules that regulate the behaviour of equitable title where property is transferred under a contract procured by fraud or other vitiating circumstance. It is these rules, and not judicial assessments of intention, that determine the location of beneficial title. The law has never sought to calibrate dispositive intention such that whether title passes turns on evidence of subjective intention, any more than it looks to subjective intention in determining whether a contract is formed.165 Nor can the passing of beneficial title turn only on whether the contract is void or valid at common law. Unless the facts fall within one of the classes of case discussed in this Part, or another recognized category of resulting or constructive trust, beneficial title to property should always follow legal title.

against the agent who makes a secret profit, see now FHR European Ventures LLP v Mankarious [2014] 3 WLR 535 (Sup Ct) [8] –[9], [46]–[50].

161 Cundy v Lindsay (1878) 3 App Cas 459; Ingram v Little [1961] 1 QB 31 (CA); Shogun Finance v Hudson [2004] 1 AC 919.

162 [2001] 2 All ER 332 (CA); noted D O’Sullivan, ‘Distributing the Risk of Contract Fraud’ (2001) 117 LQR 381.

163 [2001] 2 All ER 332 (CA) 337.164 [1999] Lloyd’s Rep Bank 438 (CA) 461 relied on by Nourse LJ in Collings v Lee [2001] 2 All ER 332

(CA) 337–38.165 Norwich Union Fire Insurance Society v William H Price Ltd [1934] AC 455 (PC—Aust) 463 (Lord

Wright).

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Collings v Lee is therefore best regarded as an application of the established principles that regulate contracts procured by agents who lack both actual and apparent authority. It is ortho-dox that beneficial title does not pass where the contractual counterparty knows of the lack of authority. That must a fortiori be true where the contract has been procured by an agent to himself, and he is acting dishonestly, which was precisely the position as between the vendors and Lee.

Contracts that are the instrument of fraud

In Halley v Law Society166 the Court of Appeal held that equitable title to sums paid to a solicitor escrow agent and then vested in the Law Society remained with the payer, the victim of a fraud, and did not pass to the intended payee, the fraudster, pursuant to the terms of the contract under which payment was made. There was no need for an election to rescind for the equitable interest to arise. Three strands of reasoning underpinned this conclusion. First, the sums were held on express trust by the escrow agent, and the court would not permit a trustee to execute a trust in favour of one whose claim to a beneficial interest was founded on his implication in a fraud.167 Secondly, the payment having been made to an escrow agent, the payee’s beneficial title depended on the court giving effect to the contract, and it would not do so because the con-tract was an instrument for fraud.168 Thirdly, the relevant contract was not simply procured by fraud. The agreement was itself the instrument of a fraud and nothing else, and for that reason would be disregarded by the court.169

It is unclear whether the third of the court’s reasons was free-standing, such that the result would have been the same even without the interposition of an escrow agent between payer and payee. In principle the third reason should not be free-standing. Whilst a distinction can be drawn between apparent contracts that are in fact void, and contracts valid until rescinded, no clear distinction exists between a contract procured by fraud, and one that is only an instru-ment of fraud.170 Nor does the law recognize a concept of a ‘sham contract’ binding at common law but denied effect in equity by reason of the fraudulent design of one party to it.

(4) Bribes

It has generally been thought that contracts procured by the bribery of one party’s agent are voidable at that party’s instance rather than void.171 This view fails to distinguish between two situations.172 The first occurs where the agent did not actually conclude the contract on his principal’s behalf, but instead advised the principal or the like. This was the situation in

166 [2003] EWCA Civ 93, critically discussed HW Tang, ‘Proprietary Relief Without Rescission’ [2004] 63 CLJ 30.

167 Halley v Law Society [2003] EWCA Civ 93 [98]–[99] also [91], [96] (Mummery LJ), with whom Hale LJ agreed.

168 Halley v Law Society [2003] EWCA Civ 93 [47], [54] (Carnwath LJ), with whom Hale and Mummery LJJ agreed.

169 Halley v Law Society [2003] EWCA Civ 93 [45]–[47] (Carnwath LJ).170 In general, the effect of fraud on contracts and other consensual arrangements is to vitiate consent and

to make the transaction voidable: Prest v Petrodel Resources Ltd [2013] 2 AC 415 [18] (Sup Ct).171 Re a Debtor [1927] 2 Ch 367 (CA); Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR

1256, 1260; Tajik Aluminium Plant v Ermatov (No 3) [2006] EWHC 7 (Ch) [21]–[22]; P Finn, Fiduciary Obligations (1977) [515].

172 A Berg, ‘Bribery—transaction validity and other civil law implications’ [2001] LMCLQ 27, 39–41. See also Chitty on Contracts (31st edn, 2012) [31-075]; PG Watts and FMB Reynolds (eds), Bowstead and

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at least one and probably both of the two main cases usually cited in support of the general view that contracts procured by bribery are merely voidable,173 and in that situation the general view seems to be correct.

It is more difficult to understand why the contract is voidable rather than void in the dif-ferent situation where the bribed agent actually concludes the contract with the briber on behalf of his principal.174 No agent has actual authority to secretly act against the interests of his principal,175 and the counterparty is not entitled to rely on the agent’s apparent authority where it is he himself who has bribed the agent.176 Though it did not involve a bribe, Heinl v Jyske Bank (Gibraltar) Ltd177 involved loan contracts arranged by a corrupt bank official. Nourse LJ explained the effect of the dealings in the following terms:

Where an agent is known by the other party to a purported contract to have no authority to bind his principal, no contract comes into existence. The agent does not purport to contract on his own behalf and the knowledge of the other party unclothes him of ostensible author-ity to contract on behalf of the principal. Whether or not such a transaction is accurately described as a void contract, it is plainly not voidable. If no contract comes into existence, there is nothing to avoid or rescind, nor can any property pass under it.178

It would seem to follow that a contract procured by a bribe and concluded by the corrupt agent purportedly on behalf of his principal should properly be treated as ineffective unless and until ratified rather than valid until set aside. If the agent has transferred any of his principal’s assets to the counterparty in purported performance of the contract then these should be treated as being held on a constructive trust from the moment of receipt. Also, if the agent receives a secret commission, the money is held on constructive trust as from the moment of receipt, and the principal’s claim to recover it is independent of any right to set aside the contract.179

(5) Apparent gifts made ineffective by resulting trust

In certain fairly well-defined situations, where a voluntary transfer of property is made inter vivos, there is a presumption that a gift is not intended, and if the presumption is not rebutted, a resulting trust is or continues to be imposed over the property in favour of the transferor.180 The apparent gift is ineffective in equity. This is to be contrasted with the case where a gift of property is vitiated by mistake, undue influence, or other sufficient cause,

Reynolds on Agency (19th edn, 2010) [8-218]; and as to the company law aspects of the issue, RC Nolan, ‘Directors’ Self-Interested Dealings: Liabilities and Remedies’ [1999] CfiLR 235, 239–40.

173 Panama and South Pacific Telegraph Company v India Rubber, Gutta Percha, and Telegraph Works Company (1875) 10 Ch App 515; Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256. It also appears to have been the case in Re a Debtor [1927] 2 Ch 367 (CA). But cf Bertram and Sons v Lloyd (1904) 90 LT 357 (CA).

174 Cf Tajik Aluminium Plant v Ermatov (No 3) [2006] EWHC 7 (Ch) [21]–[22]. See also Chap 16, para [16.52].

175 PG Watts and FMB Reynolds (eds), Bowstead and Reynolds on Agency (19th edn, 2010) Art 23.176 Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 (HL) [31].177 [1999] Lloyd’s Rep Bank 511 (CA).178 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511 (CA) 521 and see 533. See also Rolled

Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246 (CA) 297–98, 303–04, 306–07; Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 (HL).

179 FHR European Ventures LLP v Mankarious [2014] 3 WLR 535 (Sup Ct).180 J Mowbray et al (eds), Lewin on Trusts (18th edn, 2008) [9-02]–[9-13]. Also R Chambers, Resulting

Trusts (1997).

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and title passes subject to the donor’s right to regain it upon rescission. There the gift is valid until rescinded. The rules applicable to the rescission of gifts are separately considered in Chapter 29.

(6) Other ineffective transactions

There are miscellaneous other cases where a trust is immediately imposed in respect of contractual and non-contractual payments of money. Some of the principal examples will be considered in turn.

Failure of basis181

In Neste Oy v Lloyds Bank182 a trust arose where money was paid in advance for a service at a time when the service provider had ceased trading. Sums paid by way of a special purpose loan that cannot be fulfilled at the time of receipt follow the same pattern.183

Mistaken payments

In the case of a mistaken payment not made under a contract, there is some authority that a trust may be imposed if the recipient realizes the mistake before the funds are dissipated,184 and it has been held that a trust will arise if the recipient appreciates that the payer’s mistake was the product of a fraud.185

Non-contractual payments procured by fraud

Where a payment is made other than pursuant to a valid contract, but was procured by a fraud perpetrated by the payee (or by a third party of which the payee had notice) a con-structive trust should be imposed from the moment of receipt. A bank’s payment of money pursuant to a forged letter of credit or other payment instrument should be a familiar exam-ple.186 In England and Wales there is, however, resistance to the proposition that a construc-tive trust is automatically imposed when money is obtained by fraud (unaccompanied by a breach of fiduciary duty), and even in the case of non-contractual payments it has been said that the paying party must elect to avoid the transaction before a proprietary interest can be asserted.187 This is difficult to understand, for if the impugned payment was not made pursuant to a valid contractual obligation there is no agreement or obligation to set aside before a restitutionary right springs up, and it is not easy to see what there is to ‘avoid’. The English approach appears to be founded upon a reluctance to recognize that equity will impose a constructive trust where a payment of money has been procured by fraud absent

181 For the view that this fact pattern turns upon an ‘initial failure of basis’, PBH Birks, Unjust Enrichment (2nd edn, 2005) 185–88. See also, A Burrows, A Restatement of the English Law of Unjust Enrichment (2012) 162–63.

182 [1983] 2 Lloyd’s Rep 658.183 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Twinsectra Ltd v Yardley [2002] AC 164.184 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 715, considered in Bank of

America v Arnell [1999] Lloyd’s Rep Bank 399. In Australia, Wambo Coal Pty Ltd v Ariff (2007) 63 ACSR 429 [40] (Sup Ct NSW).

185 Bank of America v Arnell [1999] Lloyd’s Rep Bank 399; Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Rep 341 [225].

186 Bank of Ireland v Pexxnet Limited [2010] EWHC 1872 (Comm) [55]–[57].187 For example, London Allied Holdings v Lee [2007] EWHC 2061 (Ch) [266]–[276].

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a breach of fiduciary duty, ‘rescission’ of the payment, or unless the facts give rise to some other recognized ground for the imposition of a trust.

The same difficulty does not arise under Australian law. Where money is stolen or a non-contractual payment is otherwise obtained by a fraud, the funds are impressed with a constructive trust as from the moment of receipt, and the defrauded party may trace his beneficial interest in equity.188 A constructive trust is likewise imposed over money obtained by selling stolen property.189

188 Black v S Freedman & Co (1910) 12 CLR 105, 110: ‘Where money is stolen, it is trust money in the hands of the thief ’ (money stolen from employer passed on to wife); Evans v European Bank Ltd (2004) 61 NSWLR 75 (CA) [111], [113] (proceeds of credit card fraud); Westpac Banking Corporation v Ollis [2007] NSWSC 956 [18], [29]–[32] (exploiting bank error by writing ‘an avalanche’ of cheques; appeal dis-missed: Shields v Westpac Banking Corporation [2008] NSWCA 268 [18]–[20]); Wambo Coal Pty Ltd v Ariff (2007) 63 ACSR 429 (Sup Ct NSW) [40] (paying away money knowing of payer’s error); Heperu Pty Ltd v Belle (2009) 76 NSWLR 230 (CA) [92]–[93] (proceeds of misappropriated cheques); MBF Australia Ltd v Malouf [2008] NSWCA 214 [32] (cheque fraud); Allianz Australia Insurance Limited v Rose Marie Lo-Guidice [2012] NSWSC 145 [32], [33] (cheque fraud); Lawrie v Hwang [2012] QSC 422 [77], [164] (defrauding of mentally impaired man). As to tracing the proceeds of fraud, Toksoz v Westpac Banking Corp (2012) 289 ALR 557 (NSWCA) 579–80.

189 Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557 (NSWCA) [69].

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