Master Programme in European and International Law (LL.M.)

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1 Master Programme in European and International Law (LL.M.) 2 nd semester Summer term 2013 Module VII: Module Coordinator: European Private Law University of Bologna, Italy Course title: Scholar: Property Law Sjef van Erp, Maastricht University, The Netherlands This document has been produced with the financial assistance of the European Union. The contents of this document are the sole responsibility of Sjef van Erp and can under no circumstances be regarded as reflecting the position of the European Union.

2 Module VII European Private Law Module Coordinator: Prof. Dr. Marina Timoteo, University of Bologna Description and Aims: The course introduces to the normative framework and sources of the European Private law, as related to the integration process of Tort, Contract and Property law. The objective of the module is to make the students familiar with the interplay between EU Private law and Member States legislation, focusing on property law, tort law and contract law. A particular emphasis is given to the role of the European Court of Justice in the process of making up EU private law, also in the light of the resistances at the national level. The module is delivered through an interactive teaching methodology, based on assigned readings and discussion of cases. Attendance and participation to in class discussions is considered to be part of the grading. Courses: 1. Tort Law (1 cp) 2. Property Law (1 cp) 3. Contract Law (1 cp)

3 INTRODUCTION 1. Introduction Compared with other areas of private law, the law of property in the countries on which this study focuses is usually considered a static area of law. 1 Where in other fields, for example, in contract law and in company law, many changes have been made over time, property law has remained static, upholding principles and methods of doctrinal reasoning that have been used for ages, some even directly derived from Roman law. 2 The reason for this is that property law is not only concerned with legal relations between persons, but also with legal relations that have an effect against third parties, in some cases even an effect against the whole world. Technically speaking, following from legal relations in respect to land the most valuable object of property law known in pre-industrial societies, in particular in Roman law a sophisticated system of property rules developed. Rather than having to add new rules to the system, property law was structured so that, when new developments in society arose, these could be included in the existing system. 3 When objects other than land became valuable, property law concerning these objects also developed. Many existing property rules could be adapted, maintaining the original structure and coherence. The law of property reached maturity much earlier than other legal areas, and for a long time was regarded to be the most important area of private law. Particularly in relation to the law of contract, property law took a more important position for many centuries. The influences of this historical development can still be seen today. The fact that the French Civil Code deals with contract law in a book titled Different ways to acquire ownership is possibly the best example. 4 However, with the rise of contract law in the nineteenth century and this field of private law taking an equally important position next to the law of property, the influences of one area on the other have created a dynamic system of interaction. 5 For example, in the German Civil Code, contract law and property law are given equal status and the interaction between contract and property has led to the recognition of new property rights. Nevertheless, under the influence of German scholarship in particular, contract law and property law have been held strictly separate, not only in respect of the effects of the legal relations these areas of law govern, but also in the study of contract and property law. 6 Property law is above all a field of system and doctrine, which will only upon careful examination show its underlying principles and concepts. 1 Van Erp 2006a, p So also Füller 2006, p See, e.g., Terrat 1904, p In French, Des différentes manières dont on acquiert la propriété. 5 On the equal position of contract law and the law of property, see Motive III 1888, p Exceptions include, inter alia, Rank-Berenschot 1992, Reid 1997b, Rutgers 1999, Von Bar & Drobnig 2002, and Van Erp 2004b, Füller 2006.

4 1.1. Personal Rights and Property Rights The difference between the law of obligations and the law of property is best viewed in terms of the legal relations that are dealt with by these respective fields of law. The law of obligations, in particular its subspecies contract law, concerns itself with personal rights. Contractual rights concern legal relations entered into by two or more parties that only bind those parties who have agreed to the terms of the legal relation. 7 This basic principle of contract law is known as privity of contract. When a third party interferes with a personal right, the holder of that personal right must resort to the law of obligations to act against such interference. 8 Typically, the law of obligations will provide a remedy in tort law. Opposed to these personal rights are those legal relations governed by the law of property. These legal relations are not only made between two or more persons, but also affect third parties in respect of an object. 9 It is the link to an object combined with this third-party effect that is characteristic of property rights. As a basic principle of property law, these legal relations, typically known as property rights, have effect against third parties by their nature. 10 When the object is transferred, property rights in respect of that object will transfer as well. 11 Also when the object falls into the hands of a third party, the property rights will remain resting on the object, enabling the right-holder to act against this third party. In property law theory this third-party effect is commonly known as the right to follow or droit de suite. Furthermore, when a property right is created in respect to an object, the holder of that property right as a creditor will be in a privileged position, compared with other creditors of the same debtor. This effect is known in property law theory as the right of preference or droit de préférence. In other words, entitlement to a property right allows its holder to act not only against the person with whom he created the property right, but also against third parties interfering with his rights. In contrast with acting upon interference of a personal right, the holder of a property right may use property law to act against an interfering third party. 12 In order for parties to grant third-party effect to their legal relation they must submit their relation to the law of property and for this a price must be paid. Parties can elect the third-party effect, but only if they comply with the rules set out by property law. In property law, therefore, party autonomy is limited in exchange for third-party effect. When parties choose to settle for a personal right, property law cannot impose these limits on party autonomy and in principle the parties are free to decide on what they want. 13 In contract law, there is party autonomy, only the 7 Moreover, in the other area of the law of obligations, the law of tort, only personal relations arise. However, in respect to these relations, no party agreement is required. 8 See Van Laarhoven 2005, p. 48 et seq. 9 Reid 1997b, p I.e. not because the parties have expressed their desire to have third party effect, but through the existence of the property right. 11 However, physical control over the object can be retained by making use of the concept of possession. 12 English law forms an exception to this where also in property law the remedies in the law of obligations must be used to protect a property right. Typically in case of movable objects this is the tort of conversion. See Swadling 2000a, p , Bridge 2002, p. 47 et seq. 13 Reid 1997b, p. 228.

5 parties to the contract, and not third parties, are bound by the terms of that contract. 14 The other area of the law of obligations, the law of tort, also deals with personal rights. In contrast with contract law, legal relations in the law of tort come into existence upon the occurrence of a factual situation, usually where one party damages another party or the interests of another party. The relation that comes into existence is a personal relation in respect to the person causing the damage and will entitle the victim to compensation. 15 The difference between personal rights and property rights is therefore directly related to the separation between the law of obligations and the law of property. The law of contract and the law of property are therefore different from each other, especially in respect of the content of the rights that they govern. Under the influence of German legal thinking and because of the fundamentally varying effects of personal and property rights, most legal systems uphold a separation between these two areas of law. 16 Nevertheless there is also a close relationship between contract law and property law, especially when considered from the perspective of property law. In order for a property right to come into existence, parties must enter into an agreement that first of all will constitute personal rights. When the requirements of property law have been fulfilled, the personal right will become a property right and will be governed by property law. Another example is the transfer of a property right from one party to another. In order for a transfer to succeed an agreement between two parties is needed. Depending on the system of property law the agreement as such will transfer the property right or property law will impose additional criteria that must be fulfilled before the property right transfers. 17 Furthermore, in most legal systems the separation between the law of obligations and the law of property also results in legal relations that do not clearly fall into either of these areas of law. An example of such a right is the right of lease. In many legal systems, especially civil law systems, the right of lease is a personal right binding only the lessor and lessee. However, as a means of protection for lessees, these systems have adopted a rule, albeit mostly with regard to land and buildings, of sale does not break a lease. 18 Under this provision, a lessee who is confronted with an owner who transfers his property right to another person will continue to be a lessee, but now with a new lessor. The right of the lease therefore has limited third-party effect because it binds the new owner to the terms of the lease agreement between the lessee and the principal lessor. 19 In every legal system where lease is a personal right, the relation between the law of obligations, to which lease belongs in those systems, and the law of property, 14 Also in contract law, parties can be bound more than just by the limits of the law. In case of specific contracts such as lease of an immovable or a labour contract, contract law imposes formalities and certain content upon these legal relations as well. See, inter alia, Atiyah 1979, Trebilcock 1993, Hofer 2001, Farnsworth 2006, p Van Dam 2006, p. 3 et seq. 16 Füller 2006, p However, in English law the law of torts is used to protect property rights, creating a strong link between the two areas of law. However, also in English law the law of tort creates only personal relations. See Chapter 6 English Law. 17 See, on different systems of transfer, in this chapter; 4. Terminology, see also Van Vliet Art CC, Para. 566 BGB, Art. 7:226 BW. 19 See Westrik 2001.

6 where the right of lease may seem to belong, is being discussed. 20 However, by making use of doctrinal arguments, such as the separation between the law of obligations and the law of property, the contractual nature of lease is upheld and the limited third-party effect of a lease is considered an exception. 21 Many legal systems are therefore confronted with a tension between the law of obligations and the law of property. Depending on the legal system, the law of property will be, to a greater or lesser degree, influenced by the law of obligations, in particular by contract law. The discussion on the influence of contract law, in particular if the acceptance of a quasi-property right is the result, will return in each legal system that is discussed in this study Property Law The law of property, or the law of things as it is sometimes called, deals with legal relations between persons in respect of objects (or things). 23 These legal relations, or better, property rights, exist with regard to tangible objects corporeal movable objects or corporeal immovable objects, and intangible objects, or incorporeal objects such as claims. The law of property provides rules on property rights in respect of these objects, including their creation, exercise, execution, termination and other forms of destruction. Because of the third-party effect of the rights the law of property deals with, these rules cannot usually different from other areas of private law be simply deviated from by party agreement between the parties, in contrast with other areas of private law Principles of Property Law Although property law can be studied from its technical rules, and these rules can be compared between one country and another, this will not provide a complete overview of the law of property. Although many property law systems use the same technical rules for the same purposes, the application of these rules to a certain problem may differ from system to system. Property law as a doctrinally coherent system is governed by a set of principles, according to which any type of property can be expressed. When the comparison is taken to this general level of principles, it becomes possible to place these technical rules into a context, allowing a better and more complete comparative overview Even in English law where a lease is a property right, the right originates as a personal right. See Chapter 6; 2.2. Leases of Land. 21 On the place of lease in French, German and Dutch law, see Chapter 3; 4.6. Lease, Chapter 4; 4.4. Lease of Immovable Objects, and Chapter 5; 4.3. Lease of Immovable Objects. 22 See Chapter 3; 4. Borderline Cases in French Property Law, Chapter 4; 4. Borderline Cases in German Property Law, and Chapter 5; 4. Borderline Cases in Dutch Property Law. In respect to English law, because of the different nature of the English legal system, the discussion on the borderline between personal rights and property rights is included in the discussion of property rights. See in particular Chapter 6; 4. A Numerus Clausus in English Property Law. 23 See, e.g., Van der Merwe & De Waal 1993, Swadling 2007, p In the same sense see Van Erp 2006a, p. 1050, Van Erp 2006b, p. 13 et seq., Michaels 2006a, p. 364 et seq.

7 The basic principles of property law are the principle of numerus clausus and the principle of transparency, which can be further divided into the principle of specificity and the principle of publicity. 25 The principle of specificity determines to what extent the object on which a property right is created must be specified. In many legal systems the rules on specificity are under pressure by developments in the field of security rights in respect of claims, where creditors are demanding property security rights in respect of future claims. Future claims are objects of property law that cannot be identified yet, as they do not exist. Many systems face difficulties accepting property rights in respect of these non-existing claims. The other element of the principle of transparency is the principle of publicity. In property law, because of the effect of property rights in respect of third parties, information is vital. 26 Therefore, many legal systems demand registration of a property right in a register that is publicly accessible so that third parties may find out about the existence of a property rights existence. In respect of highly valuable objects, such as land and valuable movable objects such as aircraftplanes, trains and ships, registration is almost always required. 27 Although the principle of transparency is very important to property law, the principle of numerus clausus is the principle that decides on the applicability of the law of property, and therefore also on the applicability of the transparency principle. This study therefore concentrates on the principle of numerus clausus as the gateway to property law Numerus Clausus of Property Rights The principle of numerus clausus of property rights, or numerus clausus for short, refers to the idea that a system of property law imposes limitations on private parties that want to create property rights. 28 After its literal meaning, in many legal systems the term numerus clausus in property law refers to a closed list of property rights. Given its importance to society as a whole, many legal systems provide rules on property law through legislation. 29 In countries as France, Germany and the Netherlands, a separate part in the Civil Code deals with the law of property. When these systems adhere to the principle of numerus clausus this means that in principle only those property rights that are allowed by the Civil Codes especially are recognised as property rights. 30 As a result parties can only create property rights that fulfil the criteria set by this legislation, leaving a limited freedom or no freedom at all to shape the content of their property relations. The origin of the idea of numerus clausus can be found in the debates held after the French Revolution. In France, where the feudal system of landholding had been abolished, the legal system returned to a Roman-law inspired law of property in 25 Van Erp 2006b, p On principles, fundamental principles and model rules see DCFR Interim Outline 2008, Nos , p Van Erp 2006b, p Van Erp 2006b, p The term private parties refers also to public legal entities acting as a party in private law. 29 See Smits 2002, p , Van Erp 2006b, p Although in some legal systems property rights are also created through special legislation. See, e.g., Chapter 3; 3.4. Emphyteusis, and Chapter 4; 3.3. Superficies.

8 which, in contrast to the period before the Revolution, there was a separation between the law of obligations and the law of property. 31 In order to express the new property law system, the new French legislature wanted to provide an overview in the Civil Code of those property rights that from now on would be recognised. 32 However, the real discussion on the closed system of property rights as a principle of property law and therefore a part of property law theory originates in 19 th nineteenth-century German legal thinking. 33 The German Bürgerliches Gesetzbuch (BGB) adopted Von Savigny s theory on Vermögensrecht, within which property law and the law of obligations form separate and distinctive parts of the law. 34 In the law of property as a separate area of law, because of its foundations taken from Roman law, the most extensive property right was a unitary and absolute right of ownership. All other property rights were considered rights lesser than the right of ownership but still with third-party effect. Because of this effect, and to protect the newly created unitary and absolute right of ownership, the Civil Code limited the number, but also the content, of property rights. In doctrinal terms this idea of limitation of property rights or Typengebundenheit can be expressed with two different terms that have become commonly accepted in explaining the principle of numerus clausus; the limitation on the number of rights has become known as Typenzwang and the limitation on the content of the rights as Typenfixierung. 35 Strongly connected to the separation between the law of obligations and the law of property, and the resulting distinction between property rights and personal rights, the principle of numerus clausus provides a filter to decide whether the law of property applies to a certain legal relation. Depending on the legal system there are different ways of describing the numerus clausus. When the principle of numerus clausus has found expression in the form of legislation, in particular as a part of the Civil Code, from which parties may not deviate, we could speak of a rule of numerus clausus. However, there are also legal systems in which the principle has not found expression as a formal rule. In some legal systems, for example, there is no Civil Code, and another source of law has a more important position than general legislation. In these legal systems the principle of numerus clausus also finds expression, usually through a decision of a court of law. 36 Finally, there are also legal systems in the world that explicitly adhere to an open system of property rights, known as numerus apertus. These systems do not 31 Pothier 1772, p. 1 et seq., Laurent 1878, p , Terré & Simler 1998, p. 67, Gordley 1994, p. 459 et seq. 32 See the statement made by Treilhard in Recueil complet des travaux préparatoires du code civil 11, p Wiegand 1987, p. 630 et seq. 34 Von Savigny 1981, Paras , Wiegand 1987, p. 631, Füller 2006, p. 8 et seq. 35 The term Tipizität is also used instead of Typengebundenheid, see Giuffrè 1992, Rainer 1995, p. 415 et seq., Wiegand 1987, p. 633, Rey 1991, p See, e.g., the English case National Provincial Bank Ltd v Ainsworth [1965] AC 1175, HL at per Lord Wilberforce.

9 have a rule of numerus clausus, but nevertheless impose limitations on parties when it comes to the creation of new, as yet unknown, property rights European Private Law Comparing property law systems based on one of the principles of property law is more and more relevant from the perspective of the development of a European private law. For many years already the European Union has been active in the field of private law, the law of contract in particular. Since 2001 the European Commission has been working on a more coherent contract law in the form of a research project that might result in a complete revision of the existing contract law acquis, including general aspects of contract law. 38 As part of the preparation for this research project, the Commission published a study on property law and tort law and how they relate to contract law. The objective of this study was to investigate how far harmonisation of contract law would have effects on the law of property. 39 As a result the researchers concluded that a harmonised contract law would certainly affect areas of property law. These areas of property law include the rules on transfer of property rights, property security rights in respect of movable objects and rules on trusts. Furthermore, the European Union has also taken several initiatives in the field of property law itself. These initiatives include Directives on stolen cultural objects, combatting late payments, and on financial collateral arrangements, as well as the Regulation on Insolvency proceedings. 40 Possible future initiatives of the Commission include the creation of a European property security right in respect of land, the right of Euro-mortgage. 41 Until now there has not been a general measure of European law harmonising the law of property. The fragmented approach of present European legislation leads to fundamental issues of national property law which sometimes cannot be completely resolved. 42 With the work of the European Commission on the creation of a European private law, the work on comparative property law becomes more important, especially in order to see the effects of European integration on the national property law systems. In respect of the fundamental principles of property law, not 37 In other words, these systems might not have a rule of numerus clausus, but still adhere to the principle by imposing limitations on private parties in the creation of new property rights. Such systems include South African law and Spanish law. South African law will return in the discussion in Chapter 7; 3.8. A Legal System Without a Numerus Clausus: South African Law. 38 Action plan 2001, COM(2001) 98, Smits See Chapter 8; European Commission Initiatives for Future Legislation. 39 See Von Bar & Drobnig Directive 93/7/EEC of the Council on of 15 March 1993 on the return of cultural objects unlawfully removed from the territory of a Member State, Directive 2000/35 of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions, Directive 2002/47/EC of the European Parliament and the Council of 6 June 2002 on financial collateral arrangements, and Council Regulation 1346/2000 of 29 May on insolvency proceedings. On these European Union initiatives see Chapter 8; European Commission Initiatives for Future Legislation. 41 See Green Paper Mortgage Credit in the EU COM(2005) 237 final, p See, inter alia, Van Erp 2004c, p. 533 et seq., Van Erp 2005, p. 252 et seq., Van Erp 2006b.

10 much comparative research has been conducted. 43 There is, for instance, no general agreement on the possibility of finding a common core in property law, nor is there agreement on the question of harmonisation of property law. 44 Furthermore, the relation between national property law and European law as well as property law as part of the law in the European Internal Market has often been neglected. 45 Only in respect of property security rights in respect of movable objects has research shown that national property law systems are subject to the law of the Internal Market. 46 In the study and development of a European private law, the law of property has not always been given the attention it deserves. Fundamental questions of property law have been left aside, sometimes due to a preconception of incompatibility. The current developments in European contract law and their possible effect on private law in the European Union enable property lawyers to look into fundamental questions of property law. 47 The principle of numerus clausus as the gatekeeper of property law is one of these fundamental principles that deserve much more attention, even more in the light of the development of European private law. 43 An exception is the work of Van Erp, see Van Erp 2006b, p , Van Erp See, on the general conception of property law, Gordley 2006a, p On harmonisation, see Kieninger 2004, p. 647 et seq., Rank 2006, p. 201 et seq. 45 However, see Smits 2002, p. 245 et seq., Van Erp 2006b. 46 See Kieninger 1996a, Kieninger 1996b, Rutgers 1999, Roth When fundamental questions of contract law are considered, fundamental questions of property law might be included as well. On the discussion of fundamental elements of contract law, see Schuze 2005, p

11 COMPARATIVE OVERVIEW 1. Introduction The property law systems of France, Germany, the Netherlands and England represent a large part of the legal traditions in Europe. 1 In the past, the comparative study of the law of France, Germany and England, in particular, consisted of the search for similarities and dissimilarities between these legal systems. 2 These three legal systems have also been used to draw initial conclusions for a European Private law. 3 Not only have comparative studies led to a better understanding of foreign legal systems, they have also led to initiatives providing common rules on the basis of comparative analysis. 4 These developments have mainly taken place in an area of private law where there is a common basis in Roman law 5 the law of obligations, in particular the law of contract. It is also in contract law that the well-known Principles of European Contract Law, the UNIDROIT principles on international commercial contracts, and, most recently, the Principles of European Law, have been drafted. 6 Partly based on these comparative law efforts, it is also in this area that the European Union has issued a series of Directives, mainly for the purpose of consumer protection. 7 Furthermore, the European Commission continues to work on a more coherent European contract law with the development of a Common Frame of Reference (CFR) as the latest issue. 8 In comparison with the law of contract, the law of property has often been held to be underdeveloped. The study of comparative law has been considered less interesting in this area in Europe because of the major differences between the laws 1 Zweigert & Kötz 1998, p. 63 et seq. For a critical view on using European legal traditions as a standard in comparative law, see Glenn 2006, p See, inter alia, Koschaker 1995, Zimmermann 2006, p , See, e.g., Zimmermann 1996a, Gordley 1993, p. 498 et seq., Van Vliet 2000, Sagaert See Zimmermann 2006, p See, e.g., Zimmermann 1996a, Gordley 1991, Van Dam See Goode 2004, p. xix, Zimmermann 2006, p On the Principles of European Law (PEL) see Chapter 8; European Commission Initiatives for Future Legislation. 7 See, e.g., Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts, and Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises. On these Directives see Zimmermann 2006, p See Communication from the Commission to the European Parliament and the Council on European Contract Law, COM(2001) 398, Communication from the Commission to the European Parliament and the Council. A more Coherent European Contract Law. An Action Plan. COM(2003) 68, Communication from the Commission to the European Parliament and the Council. European Contract Law and the revision of the acquis: the way forward. COM(2004) 651, and Green Paper on the Review of the Consumer Acquis COM(2006) 744. On the Common Frame of Reference (CFR) see, inter alia, Rutgers 2006, p. 217 et seq., Van Erp 2006b, p , Smits 2006, Smits 2007, p. 281 et seq.

12 of the EU Member States. 9 Traditionally, it is held that these differences are due to the national character of property law, in particular with respect to land, and the role property law plays in taxation issues. 10 Property law systems are traditionally perceived as very different from each other, and common principles covering the whole area of law, such as the Principles of European Contract Law, the UNIDROIT principles, or the Principles of European Law, have not been drafted. However, in specific areas that touch upon property law aspects, such as trust law and insolvency law, attempts to draft common principles have been made. 11 One of the most important reasons for the lack of comparative initiatives is that in the area of property law the differences between the civil law and the common law tradition have been considered to be unbridgeable. 12 Once more, compared with contract law, relatively few studies have been devoted to the comparison of these legal systems to determine whether this is actually the case. 13 The results of studies in comparative property law show two things. First, differences between common law and civil law certainly exist. Second, there are also differences amongst civil law systems and these are sometimes just as big as the differences between common law and civil law. However, these studies also show that differences in and between both areas, common law and civil law, can be bridged Property Law in Development The developments in the study of comparative and European property law go hand in hand with the changing field of property law. In the last few decades, property law has moved itself away from the very static system it has been since the period of Roman law. With the exception of the ancien régime, where, under the feudal system, new property rights were created, the list of property rights in most legal systems remained static and Roman-law inspired. On the occasion of the 200th anniversary of the French Civil Code, Libchaber took the opportunity to plead for a re-codification of French property law. 15 A recodification is needed, he argues, because property law has developed in recent decades in such a way that the current regulations can no longer be sufficiently applied. 16 In his view, property law has been subject to three developments; changes in concepts, changes in objects and the development of new techniques. 17 Although Libchaber s ideas are based on French law and the French Civil Code, his remarks are of a general European importance. In fact, it is partly because of the influence of ideas from other legal systems, and the increasing Europeanisation as well as internationalisation of property law, that Libchaber comes to his ideas. Of course, these European and international influences are also present in other legal systems. 9 See Van Erp 2006a, p. 1044, Sagaert 2007, p See also Gray & Gray 2005, p See Hayton, Kortman & Verhagen 1999, McBryde, Flessner & Kortmann See Van Erp 2006a, p See, e.g., Van Vliet 2000, Zwalve 2003, Sagaert For a similar observation see Zimmermann 2006, p See, e.g., Van Vliet 2000, p. 201 et seq. 15 Libchaber 2004, p. 297 et seq. 16 Libchaber 2004, p Libchaber 2004, p

13 The first challenge for property law that Libchaber recognises is the change in concepts. This change is visible, in particular, in the changed applications of the right of ownership. 18 When the French Civil Code was drafted, its drafters had a certain idea of society and the function of the law of property, in particular of the right of ownership. As a reaction against the fragmentation of ownership in the ancien régime, the new definition of the right of ownership created a unitary right. 19 The right of ownership of the makers of the Civil Code was a concept of ownership of an immovable object. 20 However, in modern property law, the concept of ownership is more and more seen as the paramount set of legal relations in respect of an object. 21 This includes questions of whether the right of ownership also includes intellectual property rights, and whether the right of ownership can also be held on other rights. 22 Furthermore, the unitary concept of ownership as a rejection of fragmentation is increasingly confronted with types of co-ownership in which either legislation or party agreement modifies the relations between the co-owners in such a way that the right of ownership in its natural form is no longer recognisable. 23 This in particular includes the law in respect of apartments. Secondly, Libchaber signals that property law is faced with an increase in the types of objects that do not fulfil the criteria of the original objects the drafters of the Civil Code had in mind, which were immovable objects, and, possibly, movable objects. 24 More and more incorporeal objects, for example, ideas and other intellectual property rights, as well as claims, are becoming subjects of property law in a system that is not specifically intended to deal with them. 25 For example, general rules on acquisition and transfer might be difficult or sometimes even impossible to apply. 26 The third and final challenge Libchaber recognises is the development of new techniques of property law. This challenge combines the two former challenges and brings the focus on to numerus clausus. 27 New techniques of holding property rights include modifying existing property rights, as well as possibly creating new types. In respect to new techniques, this includes the development of rules on substitution or real subrogation, which allow the object of a property right to be replaced by substituting other objects, for instance, money instead of corporeal objects. 28 Changing property rights themselves include the law on apartment ownership just mentioned, but also the development of real or qualitative obligations, and the development of the right of lease. 29 Especially in respect of real obligations, usually as a part of a 18 Libchaber 2004, p Art. 544 C.civ. see Chapter 3; 2.1. Ownership. 20 Libchaber 2004, p Libchaber 2004, p , Zenati 1981, p , Zenati 1993, p Although this study deliberately excludes intellectual property rights from the spheres of property law, in many, mainly Anglo-American systems, intellectual property law is considered a part of property law. 23 See Libchaber 2004, p See, e.g., Art. 516 C.civ that states that all objects are movable or immovable. See Libchaber 2004, p See also Reich 1964, p. 733 et seq., Rudden 1994, p. 83 et seq. 25 Libchaber 2004, p Libchaber 2004, p Libchaber 2004, p Libchaber 2004, p. 303, Libchaber 2004, p See also Smits 1996, p. 41 et seq., Sagaert 2004a, p. 353.

14 recognised type of property right, and rights of lease, there are strong arguments for these rights to be recognised as property rights because of the third-party effect these legal relations have been granted The Increasing Role of Contract Law Since the introduction of the Civil Codes in the civil law systems, these legal systems have undergone important developments. In the French Civil Code, the law of contract was subjected to the law of property, contract law was presented as providing ways to acquire ownership. In the German Civil Code, contract law achieved an equal status with property law. 31 In the decades that followed the introduction of the Civil Codes, contract law played an increasingly important role, eventually, in particular in commercial law, for some purposes thus becoming more important than property law. 32 In the area of property law itself, which is traditionally an area of law where private parties do not enjoy much freedom, private parties now opt for contractual solutions whenever possible. In fact, certain property law systems have allowed property law to develop by awarding some contractual relations the status of property law. Examples of these include the German Anwartschaftsrechte, in English acquisition rights, and the restrictive covenants in English law. Furthermore, German and French law give certain property effects to contractual relations characterised as Treuhand or fiducie. 33 Other legal systems, Dutch law in particular, have not followed these developments, not even when an opportunity arose with the introduction of a new Civil Code in Within the existing structures of property law, the law of contract plays an increasingly important role. 34 In those areas where property law allows for party autonomy, parties make use of it to the maximum. Examples of these developments are in the field of servitudes, emphyteusis, superficies and apartment rights. These rights are now used to fulfil functions, for instance, in project development schemes, that did not exist in the nineteenth century. This includes possibilities for parties to separate ownership of a building from ownership of land, divide the building into apartments and grant access to the building and parking spaces. In this sense, contract law is used to combine or stack property rights to create modern-day solutions. German law presents an optimal system to make use of contract law in property law. In these developments, property law has become the servant of contract law in order to strengthen the performance of an obligation, the Sicherungsdienstbarkeit, or security-servitude, is recognised. Here, property law plays a passive role until the non-performance of the obligation. Only upon non-performance of the obligation are the property right and its strong remedies invoked Libchaber 2004, p , Van Erp 2006a, p See Motive III 1888, p See Goode 2004, p See Libchaber 2004, p See, e.g., Kieninger 2004, p On German security-servitudes see Chapter 4; 3.1. Real Servitude, and 3.2. Personal Servitudes.

15 Finally, the increasing importance of claims and other rights as objects of property rights, as dealt with in the previous section, have influence on the content of property rights as well. 36 A claim is, in essence, a personal right shaped through party agreement. When parties shape their personal right in a certain way and this right subsequently becomes the object of a property right, it could be argued that these agreements become part of the property right in it as well. Lebon provides an example of a non-transferability clause of a claim that makes a property right in respect of a claim also non-transferable. 37 The impact of this last development is such that the underlying object influences the content of the property right. In other words, the content of the claim influences the content of the property relation created on that claim. In terms of civil law doctrine, with this development the distinction between the object of a property right and the property right itself becomes less clear, and possibly it can no longer be maintained. 38 German doctrine has appropriately named these developments Verdinglichung obligatorischer Rechte, which translates as property-isation of personal rights, and Obligatoriserung dinglicher Rechte, obligation-isation of property rights. 39 These developments have consequences for the property law systems and also for the content of the recognised property rights. In other words, there is also an effect on the numerus clausus of property rights. Therefore, in the course of this Chapter, many influences of contract law will be dealt with. First, this Chapter will recall the essentials of numerus clausus (Section 1.3), then consider the property law systems of France, Germany, the Netherlands and England (Section 2) and see to which developments these systems are subject. Only after that will the Chapter return to numerus clausus and will deal with if and how it functions (Sections 3 and 4) Considering Numerus Clausus Requirements of Numerus Clausus It is useful to recall the function of the numerus clausus of property rights before embarking on a comparative discussion of the various property rights. When it comes to general principles of property law, the numerus clausus is the principle that decides which legal relations create a property right and which do not achieve this status. 40 This filtering role the numerus clausus plays is present in each system that distinguishes property law from the law of obligations. 41 In fact, for most, it is the 36 See above; 1.1. Property Law in Development. 37 See, e.g., HR 17 January 2003, NJ 2004, 281 (Oryx), Lebon See also Wibier 2007, p Struycken points out the danger of this development for civil law doctrinal thinking, see Struycken 2007, p Dulckeit 1951, p. 7 et seq., Canaris 1978, p. 371 et seq., Weitnauer 1983, p. 705 et seq. Wiegand 1984, p. 107 et seq. Another example is provided by Wibier, who argues that property security rights on bank accounts can be replaced with a contractual solution. See Wibier 2007, p. 49 et seq. 40 This role numerus clausus plays has also been named its organisational function (organisatorische dimensie), see Struycken 2007, p , See Van Erp 2006b, p. 14, Sagaert 2005b, p

16 essential function of the principle. 42 Following the basic German doctrinal distinctions, the filter of the numerus clausus comprises of two different elements. First, a legal relation must fall under one of the recognised property rights (Typenzwang) and, secondly, the rules on that recognised property right will determine how and whether the right may exist (Typenfixierung). 43 After considering the origin of numerus clausus it will be easier to place it in a comparative overview. In each of the legal systems discussed in earlier chapters, a numerus clausus has been found to exist in some form. This Chapter will not therefore repeat the search. Instead, it will, through comparison of the legal systems dealt with, analyse the property law systems of France, Germany, the Netherlands and England, in search of similarities in the existence and content of the numerus clausus Numerus Clausus as a Principle or as a Rule? Apart from the basic features of numerus clausus, this Chapter also addresses how legal systems deal with numerus clausus. As a general principle, numerus clausus ensures that private parties are limited in their freedom to create property rights. However, depending on the nature of a legal system, whether it is a civil law or a common law system, and within that distinction, a strict or a flexible system, the degree of freedom will differ. In all legal systems under discussion, the principle of numerus clausus, the idea that there are limitations on the number and the content of property rights available for private parties, is present. In a system adhering to such a general idea, parties are not necessarily prohibited from creating new property rights, but the addition of new rights might be subject to serious restrictions. However, in other legal systems, such as the strict civil law systems of Germany and the Netherlands, parties may be prohibited by law from creating new property rights altogether. In these systems the principle of numerus clausus finds expression in such a way that it might be called a rule of numerus clausus. This distinction between systems using a principle of numerus clausus and those using a rule of numerus clausus has consequences for the discussion on whether a numerus clausus is recognised in a legal system. Although the concept might be best developed and most discussed in the systems adhering to the rule of numerus clausus, these systems do not necessarily set the norm for a numerus clausus from a comparative perspective. Making the rule of numerus clausus into the standard for other legal systems should not be the way in which this concept is considered comparatively. First of all, it provides an inaccurate view of the reality of legal systems. As can be seen from the discussion on German law, even though doctrinally there is a strictly closed system of property rights, new elements, such as the transfer of ownership for security purposes, and even new property rights, such as the acquisition rights, have been added through case law. Secondly, numerus clausus as a basic principle of property law should be looked at from a comparative point of view. When the system with the highest 42 Struycken 2007, p , Rank-Berenschot 1992, p. 335, Van Erp 2006b, p. 14, Wiegand 1999a, p See Chapter 1; Numerus Clausus of Property Rights. 44 See below; 2. The Content of Property Law Systems in Europe.

17 standard is taken as the example for the other legal systems, comparison will not lead to results that can be used to develop further thought. Using the minimum standard of the principle of numerus clausus enables comparison between the legal systems, taking into account the differences and degrees to which the principle is adhered. As a result a much more nuanced overview can be gained Historical Origins of Numerus Clausus In order to provide a complete overview of numerus clausus, a look at its historical origin is necessary. Following the development of property rights in civil law dealt with in Chapter 2, one might expect to find the origin of numerus clausus in the development of property rights in Roman law. However, in considering Roman law as a basis of our current legal system, caution should be exercised. As was discussed in Chapter 2, ancient Roman law used a system of actions, not of rights. Therefore Roman law took a procedural rather than a substantive approach to private law. 45 As was also discussed in Chapter 2, the system of actions in Roman law formed a closed system, both for property law and contract law. In an approach to numerus clausus that takes a system of property rights as opposed to actions as a starting point, the fact that the system of property actions in Roman law was closed tells us nothing about whether a numerus clausus of property rights was also in place. Struycken warns us about this approach and quotes Lokin, who states: Concerning absolute rights, in which respect Roman law knew a closed system, modern law coincidentally also recognises a closed system, but on the basis of completely different arguments than those of the Romans. Roman law knew, due to its limited number of formulas, nothing but closed systems; in our system, absolute rights are limited in number, because with each absolute right, interests of third parties are at stake. It could paralyse trade when absolute rights that can be enforced against third parties can be created without limitations. 46 Although the argument that the system of actions can be opposed to the system of rights should be awarded its place in the reasoning on whether a numerus clausus existed in Roman law, it is not the sole factor that should be looked at. First of all, modern legal systems also prescribe the actions a holder of a property right may take in the case of interference or a threat of interference with his right. The best examples of this follow from German law, which, for instance, in the Civil Code, provides the actions to protect possession in case of dispossession and interference of possession, in case of re-vindication of ownership or in case of interference with the right of ownership. 47 However, there is not necessarily a closed system at its 45 See Chapter 2; 2.5. A Numerus Clausus in (Pre-) Classical Roman Law? and 3.5. A Numerus Clausus in the Corpus Iuris Civilis? 46 Lokin 2003, p. 273, Ten aanzien van de absolute rechten, waar het Romeinse recht natuurlijk ook een gesloten stelsel heeft, kent het huidige recht toevallig ook een gesloten stelsel, maar op grond van geheel andere overwegingen dan die voor de Romeinen bepalend waren. Het Romeinse recht kende door zijn beperkte aantal formula s niet anders dan gesloten stelsels; bij ons zijn de absolute rechten beperkt in aantal, omdat bij ieder absoluut recht de belangen van derden op het spel staan. Het zou op het rechtsverkeer verlammend kunnen werken wanneer de absolute rechten die tegen derden gehandhaafd kunnen worden in onbeperkte aantallen zouden kunnen worden gevestigd. See Struycken 2007, p See, 861, 862, 985 and 1004 BGB respectively.

18 base. In modern law, Lokin seems right in that respect, the decision to recognise another property right is not the decision to recognise a new real action. Secondly, the fact that Romans thought in concepts of actions and not in concepts of rights should not end the discussion on the closed nature of the property law system. Just like in modern law, the recognition of a property right is dependent on its authorisation by the legal system. Depending on the sources of law and the hierarchy between them in a legal system, recognition of a new property right is achieved through legislation or case law. 48 In (pre-) classical Roman law, the sources were edicts of Praetors and legal writers, and only in Emperor Justinian s time was there legislation that took the form of the Corpus Iuris Civilis. The question of awarding an action of course took place in the legal environment of procedural law, but awarding a new action to a new situation was not unthinkable. In fact, at the time of the development of property rights, new actions were created or old ones were modified so as to adapt to the newly recognised situations. 49 Behind this line of argumentation is the question of when a new property right is recognised. If the development of property rights is taken into consideration, new property rights come with changes in society, and, most of the time, they demand adaptation of the already existing rights. When Roman society developed from a purely agricultural into a more urban economy, the category of rural servitudes was complemented by the development of urban servitudes. 50 Whereas a transaction for security purposes could function in a small society where everyone knew each other, and could survive because of the requirement to have witnesses with a mancipatio, the new Roman society, with its larger communities and many peregrini, strangers, required a transfer of possession for a new security right, pignus. This was originally a contract, but only later became a property right through the development of the actio Serviana. 51 Moreover, the real actions awarded in Roman law led to a parallel recognition of property rights when Roman law was received, from the twelfth century onwards, by the efforts of the jurists Bartolus and Baldus. 52 Following this method, the rei vindicatio led to the right of ownership, the actio confessoria led to rights of servitude, and the actio Serviana to a right of pledge. 53 In this period, the recognition of the list of rights became accepted and led to a more or less closed system. 54 When legal doctrine developed, and concepts became clearer, for instance, the distinction between the right of ownership and other property rights in Donellus work, new property rights were added in a logical system at a time when legal writers could do so. Finally, in the period of the drafting of the Civil Codes, when the concept of a closed system of property rights was dealt with, this led to a change in hierarchy of sources of law. 55 In the Civil Codes of both France and Germany, it is provided, 48 More on this reasoning see below in 3. Numerus Clausus in Comparative Analysis. 49 See Chapter 2; 2.4. Other Property Rights, and 3.4. Other Property Rights. 50 See Chapter 2; 2.4. Other Property Rights. 51 See Chapter 2; 2.4. Other Property Rights, and 3.4. Other Property Rights. 52 See Chapter 2; 4.4. Other Property Rights. 53 Furthermore Baldus recognised the right to succession, the ius heriditatis. See Feenstra 1979, p. 14, Feenstra 1989, p Of course, in the period of the Ius Commune, there was always local customary law that could also be the source of property rights. See Chapter 2; 4. The Ius Commune. 55 In the same sense, see Struycken 2007, p. 169.

19 albeit implicitly in the German Civil Code, that only those property rights mentioned by the Civil Code could be property rights. 56 It is only in this period that a rule of numerus clausus surfaced. Therefore, the real origin of numerus clausus could very well be found in the drafting of the Civil Codes. However, whether the origin of the rule of numerus clausus should be found in French or German law remains a subject of debate. Treilhard, a member of the commission drafting the French Civil Code, made his intentions about Article 543 C.civ very clear when he stated that, in his view, the Article contained the only modifications to which the owners can be susceptible in our political and social organisation. 57 Although, at a later stage, rights have been added, and a decision of the Cour de cassation from 1834 has led to a lively debate on whether Article 543 C.civ constitutes an exhaustive list, the intention of the legislators with this Article seems clear. However, in German law, express limitations on party autonomy are made by the legislature which, in the Motive, explicitly stated that the number of property rights is limited. 58 However, the term numerus clausus is not used by either of the explanatory memoranda. Struycken mentions he has found the earliest mention of the term numerus clausus in a textbook by Heck from I have not been able to find an earlier reference to the term numerus clausus before that. In French literature the term numerus clausus is not much used either. French writers have written more about limiting property rights, or in terms of the private autonomy of the owner. 60 Considering numerus clausus as a principle and not as a rule, the general idea of limiting property rights could be as old as law, or at least as old as systematisation of law. Any right with an effect against third parties deserves special treatment and should be approached differently from those rights that do not have this effect. Granting a certain legal relation, which we now call a right, an action that enables one of the parties to act against any third party, is, although technically perhaps different, at least functionally similar to stating that a property right has effect against third parties. In order to give effect to these rights an action is also needed that enables the holder of the right to react appropriately. Reasoning that Roman law can be excluded when looking at the historical origin of numerus clausus may very well hold true for the rule of numerus clausus and the use of the term numerus clausus, which indeed seems to be a German invention dating from after the French Revolution, but it does not provide us with a full overview of the development of property rights and the system in which they function. For that, an understanding of property relations from Roman law and their development into those property rights that eventually received their place in the legal systems is required as well. 56 Art. 543 CC, Motive III 1888, p les seules modification dont les propriétés soient susceptibles dans notre organisation politique et sociale, Recueil complet des travaux préparatoires du code civil 11, p. 33. See Chapter 3; 5. A Numerus Clausus in French Property Law? 58 Die Zahl der dinglichen Rechte ist daher (...) eine geschlossene, Motive III 1888, p. 3. See Chapter 4; 1. Introduction. 59 Heck 1930, Paras. 22 and 23, Struycken 2007, p Limitation des droits réels or l autonomie de la volonté. See, inter alia, Hervieu 1981.

20 Numerus Clausus as a Principle of Constitutional Property Law, or as a Framework Principle It is Struycken s contention that numerus clausus should also be looked at as a principle of what I call constitutional property law. 61 This term does not refer to the human rights dimension of property law, but to the organisational function in the separation of powers doctrine. 62 Another term would therefore be to describe numerus clausus as a framework principle of property law. Struycken has shown that numerus clausus is also a question of which party or institution has authority to create new property rights. He comes to this conclusion after careful analysis of the development of Dutch property law in respect to the numerus clausus, and decides that numerus clausus shows the primacy of the legislature in this area. 63 This primacy should not only be seen in respect of private parties, in the sense of limiting party autonomy, but also in respect of the judiciary, which, in Struycken s view, in Dutch law has not been given the authority from the legislature to create new property rights. 64 Struycken finds reasons for this in the legislative process, in which, in his view, the interests of all potentially interested parties can be weighed and a decision can be made. Furthermore, when a law is promulgated, its existence is made known to all, and this is done before the rule enters into effect. Furthermore, it will never have retroactive effect. 65 Thus, in such a system legal certainty would be optimal. Although, in this study, numerus clausus has mainly been considered from the point of view of party autonomy, its relation with the legislature or the judiciary has also been dealt with. In respect of the hierarchy of sources of law in civil law countries, the legislature holds the prime position when it comes to law making. In common law jurisdictions, in England in particular, in most areas of property law dealt with, the judiciary holds this prime position. The internal struggle between legislature and judiciary in a certain system has not been considered explicitly. However, examples of judicial activism have been dealt with in the light of coownership, security-ownership and expectation rights. 66 In each of these cases, in each of the civil law countries, the judiciary gave recognition to a new property right, without permission to do so by the legislature. Possibly because in the Netherlands a new Civil Code was drafted relatively recently, the question on the constitutional division of powers in the area of property law was dealt with more specifically than it was in other legal systems. However, the results of the debate and the conclusion Struycken draws could be equally applied to other legal systems. On the other hand, still in respect of Dutch law, some have argued that, as a result of a development in legal practice, courts are the appropriate actors to authorise new property rights, even if there is no explicit legal basis. 67 Snijders, who 61 However, also see Merrill & Smith 2000, p. 58 et seq., Van Erp 2003b, p On constitutional property law in the sense of human rights law see Van der Walt 2005, p. 1 et seq. 63 Or, primaat van de wetgever, Struycken 2007, p. 91, 350, 753 and Struycken 2007, p Struycken 2007, p See Req. 13 February 1834, D.P I.218, S.1834.I.205 (Caquelard), HR 25 January 1929, NJ 1929, 616 (Beer brewery) BGH 24 June 1959, BGHZ 28, 16 = NJW 1958, 1133 (Anwartschaftsrecht). 67 Snijders 2005a, p 82, on Snijders argument see, in English, Van Erp 2006a, p

21 is one of the proponents of this approach, bases his arguments on a decision of the Dutch Hoge Raad in the area of unjust enrichment. This case, known by Dutch lawyers after the parties, Quint v Te Poel, concerned a claim in unjust enrichment that was not based on a specific provision in the old Dutch Civil Code. 68 Instead of rejecting the claim, the Court held that a solution could be found that fitted the system of the law, and that was connected with the cases already dealt with in the Civil Code. 69 The Dutch Hoge Raad further developed this line of reasoning in other cases that were also outside the law of unjust enrichment, including the law of property. 70 Based on this case and its general application beyond unjust enrichment, Snijders argues new objects of property law, and possibly also new property rights, can be recognised through court decisions. 71 Struycken, who sees a clear primacy for the legislature in respect to the numerus clausus, remarks that this argument does not hold true, as parties only have a (limited) freedom where the legislature specifically allows them to have this. Therefore, there can never be so much freedom as to allow parties, with permission ex post or ex ante of the judiciary, to recognise new property rights. 72 Although this debate seems to concern Dutch law specifically, proposals like those of Snijders have been made in other legal systems too. As discussed in Chapter 4, on German law, Hess has made proposals to treat any party agreement that falls within the nature of a property right and the legal system as a whole, or the gesamtgesetzliches Leitbild, as an agreement with third-party effect. 73 The arguments of Struycken can also be used against this statement. These discussions show the constitutional dimension of numerus clausus that should be taken into account when discussing the existence of the concept in the various legal systems. Not only should the relation between private parties, judiciary and legislature be considered, but also the hierarchy of sources of law that each of these three produce. 68 HR 30 January 1959, NJ 1959, 548 (Quint/Te Poel), see Struycken 2007, p de oplossing moet worden aanvaard, die in het stelsel van de wet past en aansluit bij de wèl in de wet geregelde gevallen. 70 HR 13 June 2003, NJ 2004, 196 (ProCall). On this case and the application of the Quint/Te Poel case, see Struycken 2007, p Snijders 2002, p , Snijders 2005a, p Struycken 2007, p. 775, and Hess 1998, p

22 Faculty of Law 2012/2013 European Property Law Course book Master: European Law School Nederlands Recht Fiscaal Recht International and European Tax Law Recht en Arbeid Globalisation and Law International Laws Courseperiod 1 PRI4005

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24 EUROPEAN PROPERTY LAW FROM FRAGMENTED TO SYSTEMATIC, FROM EUROPEAN TO GLOBAL PROPERTY LAW MASTER EUROPEAN LAW SCHOOL COURSEBOOK Prof. dr. Sjef (J.H.M.) van Erp, LLM Dr. Bram Akkermans, LLM Anna Berlee, LLM

25 European Property Law 2012 Prof. dr. Sjef (J.H.M.) van Erp, dr. Bram Akkermans, Anna Berlee. This course book is copyright protected. It may only be photocopied, digitally copied or downloaded for strictly personal educational use by students of Maastricht University. 2

26 European Property Law Table of Contents Table of Contents... 3 Introductory remarks... 5 Paper...6 Content:... 6 Form:... 6 Aim and object of the course...7 Structure of the course...7 Tutors...8 Guest lectures...8 Accompanying web sites...8 Use of the discussion board...8 EleUM... 8 Discussion board... 8 Evaluation of the course Before we begin, some advice on literature and sources...10 a) Course materials b) Internet sources General European law Belgian law French law German law Dutch law European Private Law c) Further reading General comparative law reports Up to date country reports (Draft) Common Frame of Reference (DCFR), Optional Instrument and European Civil Code (ECC).. 13 Comparative property law essays Before you come to class: preparation for the first meeting...14 Part I Comparative Property Law...16 Lecture 1 Policy choices, basic concepts, leading principles, ground rules and technical rules16 Materials Seminar 1 A historical perspective Materials Materials Lecture 2 Content of the principles of property law. Numerus clausus of property rights Materials Seminar 2 Principle of transparency: Specificity and publicity

27 European Property Law Materials Lecture 3 Property security rights (movables/goods) Materials Materials Seminar 3...property security rights continued (immovables/land) Materials Summary of the previous lectures and seminars (1) Part II European Property law: positive integration...26 Lecture 4 European Union property law: Opportunities and threats Materials Seminar 4 Convergence of national legal systems: trusts Materials Lecture 5 DCFR, mortgage law and the internal market Materials Materials Summary of the previous lectures and seminars (2) Part III European Property Law: Negative Integration...33 Lecture 6 - The free movement of goods, services and capital Materials Seminar 6 Applying Internal Market Law to Property Law: Goods Materials Part IV: Towards global property law?...36 Lecture 7 European property law and global developments Seminar 7 Applying Internal Market Law to Property Law: Capital and Services Materials

28 European Property Law Introductory remarks Course Overview Property law is traditionally considered as an area of law, which is solely governed by the laws of the Member States of the European Union. Moreover, because of different historical developments and the use of property law for purely national objectives such as taxes and succession, the law of property between the Member States differs greatly. Perhaps the largest difference can be seen between the civil law systems on the continent of Europe and the common law system that is in force in, amongst others, England. Until some fifteen years ago, almost no one was interested in comparing property law systems, let alone to think about European legislation in this area. However, in the last decade much has changed. First of all, knowledge of property law systems other than one s own national system has immensely increased. Based on this, we now have a better view on policy choices, general principles, basic concepts, ground rules, but also technical rules. We now better understand differences between, for example, systems of transfer of ownership, the rules on creation and destruction of property rights. Work in this area is still progressing and books are written to convey this knowledge onto academics, practitioners, and students. Secondly, the European Union, in particular in the form of the European Commission has become active, albeit carefully, in the field of property law. Legislation has been passed on the protection of cultural objects, on financial collateral arrangements, on insolvency procedures, but also in the area of protection of the environment (soil pollution), cross-border family law (matrimonial property law) and the cross-border law of succession (trusts). Moreover, legislation is also under preparation, as a part of a larger project on the better functioning of the internal market in the European Union that will deal with transfer of ownership, security rights and trusts. Finally, the European Commission is also working on the further integration of the EU land and mortgage market in respect to cross border transactions in land. Thirdly, also the Court of Justice of the European Union, as the guardian of the EU s internal market, has moved into the field of property law. The case law of the CJEU provides a different outlook on property law and the division of legislative powers between the Member States and the European Union. Potentially, the future case law of the CJEU can upset the carefully balanced, historically developed, legal systems of the Member States, without a positive result of a European replacement. Such replacement can only come from further legal integration, but is this feasible with regard to property law, particularly in an era with growing internal tensions because of the economic (Euro-)crisis? Furthermore, we should not only look inward to what is happening inside Europe, but also outward to what is happening in the global economy and global legal integration. We will, therefore, study European property law also from the perspective of global property law developments, such as can be found in initiatives taken by UNIDROIT and UNCITRAL. In the first part of this course we will start our analysis by looking at some of the differences between civil law and common law. Traditionally, mainly due to a different historical development, these two legal traditions are seen as very different. In the search for a European 5

29 European Property Law property law, the divergences between civil law and common law jurisdictions are considered to constitute the main problem. However, also differences among civil law systems as well as among common law systems should not be underestimated. As these differences can only be understood from a legal historical perspective we will first of all focus on that perspective, followed by an analysis of basic property law concepts in civil law and common law. We will approach the basic property law concepts from the leading property law principles: numerus clausus, transparency (specificity and publicity) and the underlying policy choices. Parts 2 and 3 deal with the impact of European integration on property law. Both its positive impact (harmonization and unification of the law) and its negative impact (the overruling character of the economic constitution of the EU) will be dealt with. In part 4 we will, finally, discuss the developments in Europe, seen from a global perspective. Examination At the end of the course there will be a written or oral exam; you are also required to write and present a paper. Paper The purpose of having to write a paper is that you gain more in-depth knowledge of a particular property law subject, which you find interesting, and that you get some basic training in practical comparative legal analysis. The papers will be presented in the seminar groups to learn from one another and to gain experience in presenting legal arguments orally. This paper will, together with your presentation, constitute the grade for this course. The exact requirements will be announced in the seminars and on EleUM. Basic requirements include: Content: - The teaching staff must approve the topic and title of your paper. Announcements in this respect will be made during the first seminar of the course. - You are expected to write a substantial paper on the approved topic in which you explore the topic more in depth. Please note that this requires you to research your topic extensively. The literature offered by the course may provide you with a starting point, but you are required to add a substantial amount of research yourself. Form: - On the Electronic Learning Environment of the University of Maastricht (EleUM) you will find a title page that you must use. - Your paper must be between 3500 and 4000 words - Your paper must be formatted in Times New Roman, size 11 - Line spacing in your paper must be 1,5 - The margins of your paper must be 2,54 cm (standard) on all sides. 6

30 European Property Law Aim and object of the course The aims of this course are to acquire: Basic knowledge of the historical development of property law in Europe, Fundamental comparative knowledge of leading principles, underlying policies, fundamental concepts and basic rules, Basic knowledge as to the various European harmonisation attempts (with a focus on the European Union) in the area of property law, Basic knowledge of the effects of the functioning of the internal market in the European Union and the effects thereof on private law in general and the law of property specifically The impact of global developments ( global law ) on European property law. Structure of the course During this course each week an overall lecture will be given. Also, each week there will be a seminar. The topics of the lectures have been chosen such that they relate directly to what will be discussed during the seminars of that week or the week after that. The schedule for the lectures is as follows: Course Seminar Lecture week 1 1 Introduction: Policy choices, basic concepts, leading principles, ground rules and technical rules Prof. dr. J.H.M. van Erp 2 2 Content of the principles of property law. Numerus clausus of property rights, Transparency Prof. dr. J.H.M. van Erp 3 3 Property security rights (movables/goods) Prof. dr. J.H.M. van Erp 4 4 European Union property law: Opportunities and threats Prof. dr. J.H.M. van Erp 5 5 DCFR, mortgage law and the internal market Prof. dr. J.H.M. van Erp 6 6 The free movement of goods, services and capital Dr. Bram Akkermans 7 7 European property law and global developments Prof. dr. J.H.M. van Erp 7

31 European Property Law Tutors Prof. dr. J.H.M. van Erp and Office: B1.109 BOU3 Tel.: 0031-(0) /3020 Dr. Bram Akkermans and Office: B1.008 BOU3 Tel.: 0031-(0) Guest lectures One or more guest lectures may be scheduled. More information will be given during the course. Accompanying web sites Materials will be made available electronically through the Electronic Learning Environment of Maastricht University (ELEUM): We will also use the discussion board facility within EluUM Use of the discussion board EleUM Both before and during the course the EleUM course European Property Law will be filled with announcements, additional materials and links to the Internet concerning European Property Law and current developments in European Property Law. Please note that all students are expected to check EleUM on a regular basis. Information supplied is part of the course on European Property Law. Discussion board During the course the discussion forum Discussion board on the EleUM site will be used for the following purposes: 1. A general discussion on current developments in European Property Law. 2. Questions and answers relating to the topics discussed during the seminars. 3. Discussion on the (preparation of the) papers. 8

32 European Property Law 1. General Discussion The course on European Property Law deals, on a topical basis, with the basic elements of European Property Law. However, the field of research in European Property Law is much broader than the elements dealt with in this course. Several European developments are currently taking place that will have an impact on both the national as well as the European private law systems. These developments are mostly initiated by the European Commission and include the implementation of the Draft Common Frame of Reference (DCFR) and the integration of the European Mortgage Markets. Furthermore, also other initiatives as EULIS, the European land information system and CROBECO, the cross border electronic conveyancing project, are on the way. These developments are so current that also the teaching staff is constantly discussing, debating and getting informed on these highly interesting issues. While the course progresses each of you will become an expert in the field of European property law. We are very interested in your opinion and value your participation to the debate. Over the past years many European law school students have successfully joined the debate on the development of European private law and European property law in particular. Although the seminars and the lectures will deal with these developments to some extent, there will be little time to discuss these developments in European property law more in-depth. Nevertheless, it is of high importance that you have a look at and take part in the discussion on the development of European property law. The discussion board is your tool for further exchange of ideas. The topics are not limited and new topics may be added during the course. On these discussion forums we expect you to contribute to the current debate on European property law. Contribute to the debate means that also Professor dr. J.H.M. van Erp and dr. Bram Akkermans will participate. Possibly, we will invite some of the key players in the debate to join for a particular discussion session. The general discussion on the development of European property law is part of the course and therefore also part of the material to be studied for the examination. During the tutorial meetings and the lectures, the tutors and lecturers will refer to the discussion and take out certain elements and add questions or opinions to the debate. We expect each student to participate and expect a highly productive discussion of a Master course quality. When the discussion is sufficiently interesting and of sufficient quality, the course coordinator and planning group will look for ways to publish the discussion on the internet so as to include our debate in the general debate on the development of European private law. 9

33 European Property Law 2. Questions after the lectures and tutorial meetings Of course there may also be questions and need for discussion on specific topics after a lecture or a seminar. The discussion board also allows the possibility to continue a debate or ask a question relating to the lectures and/or tutorial meetings. Naturally, the teaching staff will try to participate in these discussions. 3. Preparation for writing a paper At the end of the course each student is required to submit a paper on a topic of European or comparative property law. You may open a discussion forum to discuss your ideas and, if necessary, co-operate on the development of your ideas and papers. Consequently the teaching staff will not join in this discussion, but only monitor and moderate. Evaluation of the course At the end of the course the planning group looks back to see if anything can be improved. We encourage you to put forward any ideas for changes, more information, or anything else already during the course! Before we begin, some advice on literature and sources a) Course materials Depending on the subject, preparation for the class meetings will involve, to a varying degree, an analysis of primary sources (conventions, case law, and so on) and the study of legal literature. The book used as the principal obligatory text for the course is: Sjef van Erp and Bram Akkermans (eds.), with the collaboration of Alexandra Braun, Monika Hinteregger, Caroline Lebon, Michael Milo, Vincent Sagaert, William Swadling and Lars van Vliet, Ius Commune Casebooks for the Common Law of Europe; Cases, Materials and Text on Property Law, (Oxford/Portland, Or.: Hart Publishing, 2012). Recommended (but additional) reading is: J. Gordley, Foundations of Private Law. Property, Tort, Contract, Unjust Enrichment, Oxford: Oxford University Press, 2006) J. Gordley and A.T. von Mehren, An introduction to the comparative study of private law. Readings, cases, materials (Cambridge: Cambridge University Press, 2006) U. Mattei, Basic principles of property law, A comparative legal and economic introduction (Contributions in Legal Studies, No. 93; Greenwood Press, 2000) F.H. Lawson/B. Rudden, The Law of Property (Oxford University Press, latest edition) 10

34 European Property Law References to articles and further materials are provided for each subject separately. No printed reader for this course is provided, but when an electronic source is available this will be made accessible through EleUM or assistance will be given how to find that source. However, most of the times you will need electronic access to the University Library to reach these materials. b) Internet sources Several materials, which are going to be used during this course, can be found through Internet and are freely accessible. Good starting points for research are: General (European private law, under construction) (European property law, under construction) (LawMoos, World Legal Resource Center, Minnesota/wisconsin, USA) (Findlaw, general law site, USA) (Hieros Gamos, general law site, USA) (University of Tromsø, Norway; University of Oslo, Norway; Pace University, NY, USA; The Australasian Legal Information Institute (AustLII), Australia) British and Irish Legal Information Institute (United Kingdom, England and Wales, Scotland, Northern Ireland and Ireland) (Institute of Advanced Legal Studies, University of London, UK) (University of California at Berkeley, Boalt Hall School of Law, USA) (Cornell University Law School, Ithaca, NY, USA) x.htm (New York University Law School, USA) (Peace Palace Library Website, The Hague, the Netherlands) (Max Planck Institute for Comparative and International Private Law, Hamburg Germany) European law (European Economic Area, European Free Trade Agreement) and (Portal to European Union law) (European Court of Human Rights case law) (Harvard Law School, European University Institute, Florence, New York University School of Law) 11

35 European Property Law (European Land Information Service) (European Land Registry Association) Belgian law (Belgian Federal Parliament) (Belgian Federal Senate) (Website of the Leuven Law Library, look under E-sources) French law (Overview of French law) (French Ministry of Justice) (French Senate) German law (Overview of German law) Dutch law (Dutch case law; in Dutch) (Netherlands government information, including parliamentary bills, legislation and treaties; in Dutch) (Netherlands Ministry of Justice) European Private Law (Website with EU Legislation) (Website with national law implementing EU legislation) (Website of the Study Group on a European Civil Code) (Website of the joined network on European Private Law) c) Further reading Sometimes (optional) additional reading is suggested in this course book. Those students who wish to do further reading should consult the tutor of this course, as it is difficult to find comparative materials in the area of property law. General comparative law reports R. David (et al., eds.), International encyclopedia of comparative law, Volume VI, Property and trust (F. Lawson, chief ed.), chapter 2, Structural variations in property law (J.C.B. Mohr/Mouton, 1975) 12

36 European Property Law C. von Bar en U. Drobnig, Study on Property Law and Non-contractual Liability Law as they relate to Contract Law. Submitted to the European Commission - Health and Consumer Protection Directorate-General SANCO B5-1000/02/000574, electronically available at: /study.pdf Up to date country reports Within the European Union several expert groups (such as the Study Group on a European Civil Code) have been working on what once may become a comprehensive code of European property law. Topics which are dealt with are: transfer of movables, personal property security interests, mortgages and trust. These groups have all published series of country reports and/or reports which give a general overview. See, to give but one example, the project Tenancy Law and Procedure in the European Union under the auspices of the European University Institute in Florence: (Draft) Common Frame of Reference (DCFR), Optional Instrument and European Civil Code (ECC) In February 2009 the Draft Common Frame of Reference was published. Currently the decision making process has started as to how this draft can be transformed into a binding instrument. See: and =0&language=EN&guiLanguage=en Comparative property law essays M.E. Sánchez Jordán and A. Gambaro (eds.), Land Law in Comparative Perspective (Kluwer Law International, 2002). This book contains articles on various aspects of comparative property law. S. Bartels and M. Milo (eds.), Contents of Real Rights (Wolf Legal Publishers, 2004) J.H.M. van Erp and B. Akkermans (eds.), Towards a Unified System of Land Burdens (Intersentia 2006) Philosophical, legal theoretical and political study of property law For students interested in the philosophical and political study of property law reference can be made to the following books: J.W. Ely, Jr., The guardian of every other right, A constitutional history of property rights (Bicentennial essays on the Bill of Rights), 2nd edition (Oxford University Press, 1998) 13

37 European Property Law J. Harris, Property and Justice (Oxford: Clarendon Press, 1996) G.E. van Maanen/A.J. van der Walt, Property law on the threshold of the 21st century, Proceedings of an international colloquium Property law on the threshold of the 21st century, August 1995, Maastricht (MAKLU, 1996), part I, Philosophical justification of property and historical background C.R. Sunstein, Free markets and social justice (Oxford University Press, 1997), ch. 8 ( On property and constitutionalism ) S. Waddams, Dimensions of private law. Categories and concepts in Amerian legal reasoning (Cambridge University Press, 2003). For a summary of his ideas and a comment see: R.A. Hillman, The many dimensions of private law (a commentary on Stephen Waddams), to be found at: (legal scholarship network). Before you come to class: preparation for the first meeting Problem For civil lawyers ownership is an absolute right: a right in rem. Common lawyers tend to approach property law more from a relational viewpoint and consider ownership as a bundle of rights. The two approaches seem completely different, but the question is whether they really are. We will try to answer this question by looking, first of all, at the historical roots of civil and common property law. As part of a first introduction it may, however, also be illuminating to analyse the concept of property from a more theoretical (functional) viewpoint. The American Restatement of the Law on Property defines property as the legal relations between persons with respect to a thing. According to the Restatement [l]egal relations between persons can be of widely differing types and can be designated by the words rights, privileges, powers and immunities. This analysis is based on two articles written by W.N. Hohfeld, Fundamental legal conceptions as applied in judicial reasoning (republished in: W.W. Cook, with a new foreword by A.L. Corbin, New Haven and London: Yale University Press, 1964, republished again: Union, N.J.: Lawbook Exchange, 2000). Hohfeld distinguishes jural opposites : right/no-right, privilege/duty, power/disability, immunity/liability and jural correlatives : right/duty, privilege/no-right, power/liability and immunity/disability. To prepare the first meeting please read the extract from Hohfeld s articles, which can be found through a link on EleUM. Based on these pages the following questions will be discussed: Questions 1. Explain in your own words what Hohfeld might have meant with rights, privileges, powers and immunities. 2. Do you think that this analysis is helpful to understand what is meant by property? 3. Civil lawyers tend to consider ownership as a right in rem, common lawyers (especially 14

38 European Property Law American lawyers) tend to think of property as a bundle of rights. What do you think? In order to prepare for the course, please also read the article by J.H.M. (Sjef) van Erp from the Oxford Handbook of Comparative Law. The article can be downloaded through EleUM. Materials W.N. Hohfeld, Fundamental legal conceptions as applied in judicial reasoning (republished in: W.W. Cook, with a new foreword by A.L. Corbin, New Haven and London: Yale University Press, 1964, republished again: Union, N.J.: Lawbook Exchange, 2000) (Available through link on EleUM) J.H.M. van Erp, 'Comparative Property Law', in Mathias Reimann and Reinhard Zimmermann (eds.), The Oxford Handbook of Comparative Law (Oxford: Oxford University Press, 2006), (Available for download on EleUM) S. van Erp, Teaching Law in Europe: From an Intra-Systemic, Via a Trans-Systemic to a Supra-Systemic Approach, to be found electronically on the website of the Social Science Research Network (SSRN): 15

39 European Property Law Part I Comparative Property Law Lecture 1 Policy choices, basic concepts, leading principles, ground rules and technical rules Too much difference for comparison? The comparative study of property law often requires comparing unequal concepts. The right of ownership in civil law systems, is different from the fee simple absolute in possession in English land law or title in English personal property law. In order to enable comparison between these very different systems, property law systems can be explained in terms of policy choices, leading principles, basic concepts, ground rules and technical rules. This division brings hierarchy in property law systems and enables us to place the various concepts you are dealing with at the same level. Moreover, analysing property law systems according to policy choices, principles, concepts, ground rules and technical rules, shows that property law systems are much more similar than they seem to be at first sight. In order to prepare for this lecture, you are required to read the materials. Materials J.H.M. van Erp, Deconstruction and reconstruction of European property law: a research agenda, in Eleanor Ritaine-Cashin (ed.), Legal engineering and comparative law/l íngénierie juridique et le droit comparé. Rapports du colloque du 25e. anniversaire de l Institut Suisse de Droit Comparé du 29 août 2008 à Lausanne (Zurich/Basel: Schultess, 2009), p (Available for download on EleUM) J.H.M. van Erp, 'From classical to modern European property law?' Festschrift Kerameus (Athens/Brussels: Ant. A. Sakkoulas/Bruylant, 2009), p (Available for download on EleUM) J.H.M. van Erp, European and national property law: Osmosis or growing antagonism?, 6 Walter van Gerven Lecure (Groningen: Europa Law Publishing, 2006). (Available though EleUM) Ius Commune Casebook Property Law, Chapter 1 (S. van Erp) 16

40 European Property Law Seminar 1 A historical perspective a) Legal history Problem Comparative legal literature in the area of property law can be very difficult to find. The same is even truer for literature, which discusses basic problems of comparative property law on a legal historical basis. An article written by Barbara Pierre is a notable exception. She discusses basic problems of property law on a comparative and historical legal basis. After reading the article answer the following questions: Questions 1) Explain why lease, having a contractual character in civilian systems of law, can be accorded a proprietary character in the common law. Take into consideration the historical antecedents of the law of property in the common law. 2) The terminology "ownership" is used both in the common law and in civilian legal systems. List the main differences between the use of this concept in both systems. Explain the historical origins of these differences. 3) What is meant by `tenure', `incident of tenure', `estate' and `seisin'. Explain the relationship between these historical concepts. To what extent are these concepts present in today's common law? 4) Explain why the common law does not know an integrated system of property law as regards movable and immovable property. 5) Explain the main differences between the civilian `hypothec' and common law's `mortga- ge'. Pay attention to the historical antecedents of both concepts in your explanation. 6) Why is it so difficult to introduce the concept of `trust' in a civilian legal system? Materials B. Pierre, Classification of property and conceptions of ownership in civil and common law, in: Revue Générale de Droit 28/2 (1997), p (Available through link on EleUM) Ius Commune Casebook Property Law, Chapter 3 (B. Akkermans and W. Swadling) 17

41 European Property Law b) Basic concepts Problem It is often said that one of the main differences between common law and civil law is that according to common law ownership is fragmented, whereas in civil law it is unitary. However, French law (see the case of Caquelard c. Lemoine) and German law (Anwartschaftsrechte) accept some form of divided property. Read the Caquelard case and the German literature mentioned under materials. Questions 1) What is the unitary (civil law) concept of ownership? 2) What is the fragmented (English and American) concept of ownership? 3) Is the acceptance in French and German case law towards a mitigated type of divided ownership a development with which you can agree? Consider the theoretical and practical side of a unitary concept of property and a divided concept of property. Materials Ius Commune Casebook Property Law, Chapter 3 (B. Akkermans and W. Swadling) Caquelard c. Lemoine, Req. 13 févr (D.P. 34, , S. 34, (French Cour de cassation) 18

42 European Property Law Lecture 2 Content of the principles of property law. Numerus clausus of property rights Numerus clausus or Numerus apertus? Private law deals with relations between parties. Generally speaking, the State is not involved as a party in such a private law relation. Nevertheless, especially in property law, the State is involved because national law decides on the content of property law relations. Property law is mandatory law and that has several important effects on private law relations. First of all, property law applies to all property relations in respect to an object or thing that is situated on the territory of the legal system. This basic principle, known as the lex rei sitae rule, determines the applicable law to a certain property relation. Consequently, when a movable object moves from the territory of one Member State to that of another, the legal system that is applicable to the relation changes. Secondly, inside a particular legal system, only those property rights that are recognised in that legal system can be created. Private parties are, in other words, limited in their freedom to create property relations. These limitations apply both to the number as well to the content of property relations. In German legal literature the terms Typenzwang and Typenfixierung are used. Topics are dealt with in this lecture are: - Unitary Ownership and Numerus Clausus - Anwartschaftsrechte in German Law - A Numerus Clausus in English land law? - A different solution: the South African Subtraction from the Dominium Test. Materials J.K. Grodecki, 'Private International Law, chapter 8 Intertemporal Conflicts of Laws', in Kurt Lipstein (ed.), International Encyclopedia of Comparative Law (Mouton: J.C.B. Mohr, 1976), III. Pages 3, M.J. de Waal, 'Identifying Real Rights in South African Law: the 'Subtraction from the Dominium' Test and its Application', in S.E. Bartels and J.M. Milo (eds.), Contents of Real Rights (Nijmegen: Wolf Legal Publishers, 2004), B. Akkermans, The Principle of Numerus Clausus in European Property Law (Antwerpen-Oxford: Intersentia, 2008), Chapter 1; Paragraph 1, Chapter 7; Paragraph 1. National Provincial Bank ltd. v Ainsworth [1965] AC 1175, HL. 19

43 European Property Law Seminar 2 Principle of transparency: Specificity and publicity Problem Oddly enough, a Dutch judgment by the President of the Rotterdam District Court from 1985 gave rise to an amendment of the English Sale of Goods Act 1979 (President Rechtbank Rotterdam, 20 February 1985 (The Gosforth), S&S 1985, 91). Since the 15th century, English law recognises that title to goods passes to the buyer when the contract is made. No delivery (traditio) is needed. It gives the impression to tradesmen that if they have bought a large quantity of goods, for example 5000 tons of Brent oil, they are owners of this quantity. In the insolvency of the seller, the trustee in bankruptcy would then be under an obligation to turn this quantity over to the buyer. The Dutch 1985 case, however, demonstrated that the solo consensu rule cannot pass ownership of a quantity of goods which form part of a larger bulk. As in modern trade, most of the sales contracts are for a large quantity of generic goods rather than for the sale of specific goods, it seems that the solo consensu rule applies to a relatively small number of cases only. Yet, the English and Scottish Law Commissions advised to amend the Sale of Goods Act so as to give the buyer ex bulk a co-ownership share in the bulk. The expectation of buyers to become owners at the moment of sale was stressed again in 1994 by the Privy Council case in Re Goldcorp Exchange Ltd [1994] 2 All ER 806. General questions 1) What are the principles of specificity and publicity? 2) Do they apply equally to French, German and English? 3) Under which conditions does the Sale of Goods (Amendment) Act 1995 give the buyer of generic goods co-ownership in the goods? More specific questions in regard to Re Goldcorp Exchange 1) Explain the following terms in Re Goldcorp: in receivership, debenture, floating charge, title at law, equitable title, equitable remedy, trust, express trust, remedial constructive trust, tracing, fiduciary relationship, restitutionary proprietary interest, estoppel, bailment, representations, misrepresentation, collateral promise, mistake, failure of consideration, recission, constructive delivery. 2) Why would the claimants need to assert a proprietary right over the bullion? 3) What is the (legal) difference between a sale ex-bulk and a sale of generic goods? 4) Did the property in any bullion (according to the Privy Council) pass to the customers immediately upon the making of the purchases? Why (not)? 5) Did, according to the Privy Council, the property in any bullion acquired by the company after the conclusion of the contracts of sale with the customers pass to those customers upon acquisition? Why (not)? 6) Could the customers have obtained a title to the bullion by way of estoppel? Why (not)? 7) Explain how the bailment-argument (p. 818 ff) could have helped the customers in claiming a title to the bullion. 8) When the customers paid over the purchase moneys under the contract of sale did they 20

44 European Property Law (according to the Privy Council) retain a beneficial interest in them by virtue of an express or constructive trust? 9) Explain why, according to the Privy Council, the court should not grant a restitutionary remedy of a proprietary character in respect of the purchase moneys. 10) Would this case be decided differently according to Dutch law? Materials L.P.W. van Vliet, Transfer of movables in German, French, English and Dutch law (Nijmegen: Ars Aequi Libri, 2000), Chapter 1, 5; Chapter 4, 3. (Available through link on ELEUM) Ius Commune Casebook Property Law, Chapter 8 (M. Hinteregger and L. van Vliet). Re Goldcorp Exchange Ltd [1994] 2 All ER 806 (Available through link on ELEUM) 21

45 European Property Law Lecture 3 Property security rights (movables/goods) Credit and security Business transactions can be done on a cash basis, but also on a credit basis. In the latter type of situations, credit might be given by the counterpart, for example by a seller, or by a third party, usually a bank. Credit might be unsecured or secured. If credit is given unsecured the creditor only relies on the personal creditworthiness of his debtor and, in case of non- payment, will only be able (after a court judgment) to seize and sell the debtor s assets. If credit is secured, two types of security are distinguished: personal and real security. This lecture is devoted to discuss some particular aspects of security rights. Questions to be discussed a) What the differences are between personal and real security? b) What are the common features of security rights on movable objects? Requirements for the creation of rights Requirements for the exercise of rights Requirements for the termination of rights c) What types of security rights on movable objects are recognised? Materials Ius Commune Casebook Property Law, Chapter 5 (V. Sagaert) One special type of security right: Floating charge One special type of security rights is the floating charge. This type of security rights covers a full set of assets and debts (patrimony) of the debtor. Its existence can create all sorts of problems. Some of these problems can be seen best in case of an insolvency situation. Imagine the facts of the case of Sharp v Thompson mentioned below as an example. Materials Sharp v. Thomson [1997] SLT 837 (HL) (Available through link on ELEUM) Burnett s Trustee v Grainger and Another [2004] SLT 699 (Available through link on ELEUM) G.L. Gretton, R. Michaels, E. Dacoronia, Sharp v. Thomson: case notes, 6 European Review of Private Law 1998, p. 401 ff. 22

46 European Property Law Seminar 3...property security rights continued (immovables/land) Introduction Property security rights are not only created in order to secure a performance in respect to a movable object, also in respect to immovable objects, property security rights are made use of. Historically land was even seen as the highest value available as security for credit. Although today the value of movable objects often exceeds the value of land, for example airplane engines that are worth millions of euro, land remains a very constant and valuable collateral to obtain security. Problem A has had his eyes on the perfect house forever. Finally, after many years the house comes up for sale. A immediately approaches the seller and they reach agreement on the sale of the house. The next step, so A is told, is to go to the bank to get financing for the acquisition of the house. At Bank B, A finds out he can just afford the loan he is offered. However, he does not get the loan immediately; he must sign all sorts of papers first and even visit an official somewhere to sign more documents. Eventually the house is A s and he moves in. After 5 years, things go horribly wrong. A has had some business difficulties and has defaulted on his loan for about 6 months now. He calls his bank manager to explain the situation and they agree that he will pay the installments as soon as he can. However, when the credit crisis breaks out, Bank B informs A that it will no longer wait until A can pay and that it will sell the house. Questions 1) What is the difference between sale and acquisition? 2) Clearly Bank B thinks it has a right to sell the house. What is this right, how was it created and what powers does it confer on the bank? Consider these questions from a French, German and English perspective. 3) Make an overview of the similarities and differences of property security rights in respect to land in French, German and English law. Materials Ius Commune Casebook Property Law, Chapter 5 (V. Sagaert) 23

47 European Property Law Summary of the previous lectures and seminars (1) Introduction In the following parts of this course we are going to move into European Union (and global) property law against the background of the policy choices, basic concepts, leading principles and ground rules of property law. At this point in the course it might be helpful to summarise the previous meetings in the following scheme. The scheme is merely meant as guidance. Common aspects - policy choices a. Protection of private firsthand ownership b. Protection of commerce - property v personal rights a. right to follow b. right of preference c. grey areas - property rights: structure a. Primary rights b. Secondary rights c. Tertiary rights -property rights: content a. rights to use b. security rights c. rights to acquire a certain legal position - contracts only bind the parties (important exceptions exist) - Principles of property rights ( operational framework) - Principle of Numerus Clausus a. limited number of property rights b. limited content of property rights - Principle of transparency a. Principle of publicity i. possession ii. publicity systems b. Principle of specificity - Gound rules a. nemo plus juris ad alium transferre potest quam ipse habet ( nemo dat ) b. qui prior est tempore potior est jure c. limited rights have priority over fuller rights d. protection of property rights - Technical rules 24

48 European Property Law - principle of accession - principle of accessority - systems of transfer a. tradition systems v consensual systems b. causal v abstract systems c. deeds registration v. title registration d. deeds registration v. notice filing As we have seen, also basic distinctions exist between the major property law traditions in Europe. This can be summarised in the following scheme: Distinctive features civil law, common law - Civil law a. Personal v. property rights (general concept) b. Numerus clausus (general concept) c. Subtraditions: French, German and Scandinavian - Common law a. Feudal origins b. Tenure and estate c. Fragmentation of ownership d. Personal rights/duties v. rights/duties against others e. Limited application of numerus clausus doctrine Perhaps the list of common concepts and principles is even longer than what was discussed earlier. Upon further examination also the following common concepts and principles can be found: More common principles? - Passing of rights to third parties a. contract law (specific third party beneficiaries) b. property law - Passing of burdens to third parties a. negative burdens Examples: = servitudes = real burdens = restrictive covenants = qualitative duties b. positive burdens = servitudes (limited degree) = real burdens = supplementary role of contract law b. Positive burdens 25

49 European Property Law = contractual arrangements = public law burdens Part II European Property law: positive integration This second part of the course European Property Law will deal with property law in the European Union, the European Economic Area, the European Free Trade Association and the Council of Europe. Not from a comparative perspective, but from the perspective of the European Union. The EU Institutions, especially the European Commission, as the right of initiative belongs to this Institution, have legislated and are planning to legislate in the area of property law. This part of the course will examine existing and future property law from the perspective of the European Commission. Lecture 4 European Union property law: Opportunities and threats The fact that the European Union issues legislation in the area of property law is not obvious. Article 345 of the Treaty on the Functioning of the European Union (TFEU) states: The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership. Does this provision limit the European Union to become active in the area of property law? This lecture will outline the currently existing acquis communautaire and deal with the meaning and interpretation of Article 345 TFEU. Another, very interesting development can be seen in regard to Article 1 First Protocol of the European Convention on Human Rights (ECHR). In a recent case the ECJ held the operation of the statute of limitations in respect to a right to land in English law in violation of Article 1. This decision upset property lawyers around the world. No one had realised the human rights dimension to the operation of rules on prescription of property rights (i.e. losing property rights through lapse of time). In a Grand Chamber Decision, the decision by the lower chamber was overturned. Also the aspect of the constitutionalisation of property law will be dealt with. Materials J.H.M. van Erp, European and National Property Law: Osmosis or Growing Antagonism?, 6 (Walter van Gerven Lecures; Groningen: Europa Law Publishing, 2006). (repeated) Bram Akkermans, The Principle of Numerus Clausus in European Property Law (Antwerpen-Oxford: Intersentia, 2008) forthcoming, Chapter 8, paragraph 2.1. (Available for download on EleUM) Bram Akkermans and Eveline Ramaekers, Article 345 TFEU (ex. Article 295 EC), its meaning and interpretations, in: European Law Journal (2010), Available for download on EleUM) 26

50 European Property Law Case of Pye (Oxford) Ltd. and Pye (Oxford) Land Ltd. v the United Kingdom, 30 August 2007 (Grand chamber) (Available through a link on ELEUM) 27

51 European Property Law Seminar 4 Convergence of national legal systems: trusts Problem The integration of the property law systems of the Member States of the European Union by the enactment of legislation is reinforced by legislative activities taken by the Member States themselves. In the area of property security rights, which will be the subject of seminar 5, some Member States have voluntarily brought their law in conformity with the law in other Member States. Another area in which European countries are moving towards voluntary harmonization is trust law. Trusts are very complicated legal relations that are not easy to define. In general a trust is a legal relation in which one person holds an object or a right for the benefit of another person, without the object or right becoming part of his own estate or patrimony of assets and debts. An object or right, in other words, that is not held outright, but that is held on trust, creates a separate legal regime. Trusts are traditionally used for the preservation of value in a family or group, but are today vehicles to facilitate succession (estate planning) or investment schemes. Countries such as Jersey and Guernsey (Channel Islands), the Cayman Islands or the Bahamas have become famous as off-shore jurisdictions. These legal systems offer a favourable regime for trustees, the persons managing the trust assets on behalf of beneficiaries, who live in other countries. Questions: 1) What is a trust relation? 2) What is so special about a trust relation? 3) What are its characteristics? 4) How is it created? 5) Which legal systems recognise trust relations? Materials Ius Commune Casebook Property Law, Chapter 6 (A. Braun and W. Swadling) Christian von Bar, et al. (eds.), Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (München: Sellier European Law Publishers, 2009), Book X. 28

52 European Property Law Lecture 5 DCFR, mortgage law and the internal market A hidden European Civil Code? Besides the already existing European property law acquis, the European Commission is also taking new initiatives. Some of these initiatives only deal with property law indirectly, but some seek to regulate directly a part of property law in the European Union. First of all, there was the very large scale project to create a Common Frame of Reference in the area of (consumer) contract, tort and property law. The final outcome now seems to be a Common European Sales Law (CESL). Secondly, the European Commission, but a different Directorate General, is working on the integration of the mortgage markets in the European Union. These developments potentially may have a direct impact on national property law systems. Furthermore, initiative s are taken to unify private international law ( conflict of laws ) regarding the property law consequences of marriage and registered partnerships and in the area of succession. These, but also other initiatives, will be discussed in this lecture. Materials Sjef (J.H.M.) van Erp, DCFR and Property Law: the need for consistency and coherence, R. Schulze (ed.), Common Frame of Reference and Existing EC Contract Law (München: Sellier European Law Publishers, 2008), p (Available for download on ELEUM) Please consult the website of the European Commission on home loans: Green Paper Mortgage Credit in the EU COM (2005) 237 final (Available through link on EleUM) White Paper on Mortgage Credit Markets COM(2007) 807 final (Available through link on EleUM) S. van Erp and B. Akkermans, Public or Private Harmonisation of the EU Mortgage Market?, forthcoming (Available for download on EleUM) S. van Erp, Security interests: A secure start for the development of European property law, in: M. Hinteregger and T. Boric (eds.), Sicherungsrechte an Immomilien in Europa (Vienna: Lit Verlag, 2009), 3-39 (Available for download on EleUM) 29

53 European Property Law Seminar 5 Security rights and EULIS/Eurotitle Problem Particularly in the area of security rights problems arise at an international level. Globalisation brings with it increasing trade between private parties in different countries. Not only in business to business transactions (B2B) cross-border trade is increasing, also in business to consumer trade (B2C) increasingly consumers shop across the border. The rise of the Internet has greatly benefited consumers in their search for the best bargain. Examples of the latter are computer manufacturers such as Dell and Apple (both based in Ireland), Amazon Europe (based in England and Germany), but also Ryanair (Ireland) and Easyjet (England). In order to facilitate cross-border trade and to simplify the procedure for creditors to obtain security rights in case they deliver on credit several harmonisation attempts have been made. Some of these attempts have been inspired by the system that is used in the United States of America. There, the Uniform Commercial Code (UCC), in its Article 9, offers a single model for the creation of security interests. Questions: 1) What is the Article 9 UCC model? 2) How does it operate? 3) What is the proposal for a European Security Right about? Also with regard to immovable objects harmonisation attempts are made. Cf. the Euromortgage or Euro-hypothec. Another development is connecting land registration systems in Europe. This project, known as EULIS: the European Land Information System, offers information on property rights in respect to immovable objects created throughout the European Union (or at least in those countries that have joined EULIS). Imagine the following case: Jean and Bertrand, both French nationals living in France, have retired and are considering buying a retirement home in the south of Germany. They follow a somewhat unusual route and approach their home bank to finance the acquisition. The French bank is hesitant due to unfamiliarity with the German legal system. The bank s doubts become even stronger after it has approached a French notary who found out that the current owner is not registered as propriétaire, but as Eigentümer. The bank wonders whether Jean and Bertrand would also become Eigentümer. Is this the same as propriétaire and if, at all, can they create a French right of hypothèque on this German Eigentum? Questions: 1) How could the French notary have found out about the ownership of land in Germany? 2) Does knowledge about the national entitlement to land provide helpful assistance in a cross-border situation such as this? 3) What kind of security right must the bank create? 30

54 European Property Law 4) Would a uniform security right ( euro-mortgage ) in the EU solve this issue? 5) Could this be modeled after Article 9 UCC or is this model strictly limited to movable assets and claims? Materials H. Sigman, Security in movables in the United States Uniform Commercial Code Article 9: a basis for comparison, in: E.-M. Kieninger (ed.), Security rights in movable property in European private law (Cambridge: Cambridge University Press, 2004), p Christian von Bar, et al. (eds.), Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (München: Sellier European Law Publishers, 2009), Book IX. H. Ploeger and B. van Loenen, EULIS At the beginning of the road to harmonization of Land Registry in Europe in: 12 European Review of Private Law [2004] 3, p (Available through a link on EleUM) S. van Erp, Cross-Border Electronic Conveyancing: overcoming negative and positive integration in European property law, European Property Law Journal Vol. 1, issue 1, p (Available through a link on EleUM) 31

55 European Property Law Summary of the previous lectures and seminars (2) The past two weeks of this course we discussed European Union property law. The lectures and discussions in the seminars should have given you knowledge on the following aspects: - Voluntary convergence of property law in the Member States a. Trust, Treuhand and Fiducie. b. Netherlands: Fiducia-fobia? - Existing EU Property Law a. Retention of title and reservation of ownership b. Insolvency proceedings c. Financial collateral arrangements (pledge and title transfer0 d. Cultural objects - Future EU Property Law a. The Draft Common Frame of Reference b. European land registration and land title c. The European mortgage market d. The European security rights 32

56 European Property Law Part III European Property Law: Negative Integration The third of this course will deal with the perspective of the internal market in the European Union. No longer will the role of the European legislature (Commission, Council and Parliament), but the role played by the guardian of the internal market, the Court of Justice of the European Union (CJEU), be analysed. After the decision of the CJEU in Cassis de Dijon the European Commission quickly responded that it considered the division of tasks between the CJEU and itself in the following way. With the introduction of the principle of mutual recognition, the Commission no longer needed to legislate extensively. Instead, where the Court had acted, the Commission would focus its attention elsewhere. This part of the course offers an innovative look on the development of European property law. We will explore some of the case law of the CJEU together and discuss the effects on the law of property, both on a Member State as well as on a European level. Lecture 6 - The free movement of goods, services and capital Free movement, also of (property) rights? In the internal market of the European Union there are four freedoms which are guaranteed: The free movement of goods, persons, services and capital. These are essential for the functioning of the internal market. Moreover, the four freedoms are closely connected with EU competition law, which further prevents distortions in the functioning of the internal market. In German legal literature the term Wirtschaftsverfassung is used to describe this operational structure of European economic integration. It is, indeed, the EU s economic constitution. Originally, the free movement of goods has been the most developed freedom. It is in this area that important decisions, such as Dassonville, Cassis de Dijon, and Keck and Mithouard have been made. In recent decades, the free movement of persons and services has added a tremendously beneficial effect to the internal market. One very famous example of this is the Bosman decision, in which the CJEU had to rule on the transfer system regarding football players in the European Union. However, most recently, actually since the Treaty of Maastricht, the freedom of capital has become fully operational. Each of these four freedoms can have an effect, not only in public law relations, but also in private law, especially property law relations. The free movement of goods deals with movable objects, moving from one Member State to the other. The other freedoms concern, for example, the acquisition of an immovable object in another Member State. When a person would go to work in another Member State and be prevented by the property law of that other Member State to establish herself there, this could potentially violate the free movement of persons. The same can be argued for the freedom of services that includes the freedom to provide and to receive services. Finally, if the immovable object is acquired as an investment, the free movement of capital might be at stake. 33

57 European Property Law This lecture will be devoted to the essentials of free moment law, which will be further elaborated upon during the next two seminars. Materials C. Barnard, The Substantive Law of the EU. The Four Freedoms (latest edition, Oxford: Oxford University Press, 2007), Part I Introduction to the Issues (Not available through EleUM, please consult the University Library) Case 8/74 Procureur du Roi v Dassonville [1974] ECR 837 (Available through link on ELEUM) Case 120/78 Rewe Zentrale v Bundesmonomolverwaltung für Branntwein ( Cassis de Dijon ) [1979] ECR 649. (Available through link on ELEUM) Joined Cases C-267 & 268/91 Criminal Proceedings against Keck and Mithouard [1993] ECR I (Available through link on ELEUM) For those students with less knowledge of internal market law, please consult (do not read entirely, but treat it as a reference work): Guide to the application of Treaty provisions governing free movement of goods available at: 34

58 European Property Law Seminar 6 Applying Internal Market Law to Property Law: Goods Problem The free movement of goods has contributed tremendously to the development of the internal market. However, it has taken a long time before private lawyers began to realize the impact of the free movement case law in this area. Once this had happened, very interesting conclusions were drawn. The obvious counter argument against any influence of internal market law on national property law is Article 345 TFEU. We have seen, however, that he CJEU takes a rather different view on this matter. Problem A German national buys a car in Germany. The manufacturer delivers the car to him directly (represented by a salesperson). However, the engine of the care has been made elsewhere and was delivered to the manufacturer under extended reservation of ownership. After a few weeks, the buyer drives the car to the Netherlands where he studies. As part of his studies, this student has a private consultancy firm; he provides legal advice to local companies. Business is bad and the consultancy firm is declared bankrupt. During the insolvency proceedings the ownership of the car becomes a topic for debate. One of the difficulties is that the Netherlands do not recognise extended reservation of ownership clauses. Questions: 1) How would this case be solved in the light of the case law of the CJEU on the free movement of goods? 2) Can the Netherlands refuse to recognise the German reservation of ownership? 3) Does European law apply in such a horizontal situation? Materials Case C-69/88 H. Krantz GmbH & Co v Ontvanger der Directe Belastingen en de Staat der Nederlanden [1990] ECR I-583 (Available through link on ELEUM) Opinion Advocate General Darmon to Case C-69/88 Krantz [1990] ECR I-583 (Available through link on EleUM) Bram Akkermans and Eveline Ramaekers, Free movement of goods and property law: Krantz revisited, Working Paper (available at: 35

59 European Property Law Part IV: Towards global property law? The ongoing economic crisis in Europe not only has internal, but also external causes. The financial markets today are worldwide connected. Business is conducted on a global scale. Goods, services and capital flow everywhere. We have seen that in Europe the process of regional economic integration has resulted in a process of continuing and increasing legal integration, also in the area of property law, in spite of existing legal diversity. This is a process that can also be seen happening worldwide. How does global economic integration have an impact on legal integration and how is European legal integration part of this global developments? This is the leading question in the last part of this course. We will discuss legal diversity worldwide and various initiatives to create uniform ( global ) law. Lecture 7 European property law and global developments The final lecture in the course is devoted to the future of European Property Law. Many developments are foreseeable in the next decades, which will all have an influence on property law in the European Union. The content of this lecture will be as up to date as possible. Materials Ius Commune Casebook Property Law, Chapter 10 (B. Akkermans, M. Milo, V. Sagaert) Chr. Saporita, Reconciling Human Rights and Sovereignty: A Framework for Global Property Law, 10 Indiana Journal of Global Legal Studies (2003) (Available through the University Library). Materials for further reference S. van Erp, A. Salomons and B. Akkermans (eds.), The Future of European Property Law (Munich: Selllier European Law Publishers, 2012) B. Akkermans and E. Ramaekers (eds.), Property Law Perspectives (Antwerp/Oxford/Portland, 2012) 36

60 European Property Law Seminar 7 Applying Internal Market Law to Property Law: Capital and Services. Problem The final meeting in this course is devoted to some interesting cases decided by the CJEU in the area of immovable property law. Martina is an Austrian national. She is from Vienna and has wanted to own a house in the Salzburg area for many years. Finally she buys a house which is part of a development scheme just outside of Salzburg. All negotiations go perfectly well until, at the very last moment and as a mere formality, Martina is informed that she needs to submit her planned acquisition of ownership of a house in this area for approval to the local court in Salzburg. In order to obtain this permission she must state that she will choose her principal residence in this house, and that she will not employ any economic activity. Martina is outraged, and refuses to ask permission by the court. She acquires the right of ownership of the house, but proceedings to annul the sale are brought against her by the local district governor. Questions: 1) Which fundamental freedom is at stake here? 2) How would you solve the case? 3) What other fundamental freedom(s) could be at stake here? 4) Could world trade law have an impact? Materials Case C-302/97 Klaus Konle v Republik Österreich [1999] ECR I-3099 (Available though link on ELEUM) Case C-515/99 Reisch and others v Bürgermeister der Landeshauptstadt Salzburg and Grundverkehrsbeauftragter des Landes Salzburg [2002] ECR I-2157 (Available through link on ELEUM) Opinion Advocate General Geelhoed to Case-515/99 Reisch, and others [2002] ECR I- 2157, paragraphs (Available through link on ELEUM) Case C-448/98 Criminal Proceedings against Jean-Pierre Guimont [2000] ECR I (Available through link on ELEUM) Barnard, C., The substantive law of the EU. The four freedoms (2nd edition, Oxford: Oxford University Press, 2007), Pages (services) and (capital). (Not available through EleUM, please consult the University Library) Bram Akkermans, Property law and the internal market, to be found electronically on the website of the Social Science Research Network (SSRN): 37

61 European Property Law Summary of the previous lectures and seminars (3) The past two weeks in this course have dealt with EU Internal Market Property Law. The lectures and discussions in the seminars should have given you knowledge on the following aspects: - Free Movement of Goods a. Rules relating to product characteristics b. Rules relating to certain selling arrangements c. Discrimination model or market access? d. Effects on property law in respect to movable objects - Free movement of capital, services and persons a. Differences from free movement of goods b. Effects on property law in respect to immovable objects - EC law and private law relations - Reversed discrimination and private law relations - The future of European property law - Impact of global legal developments 38

62 [1995] 1 A.C. 74 Page 1 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) [1994] 3 W.L.R. 199 *74 In Re Goldcorp Exchange Ltd. (In Receivership) v Privy Council Lord Templeman, Lord Mustill, Lord Lloyd of Berwick, and Sir Thomas Eichelbaum 1993 Nov. 22, 23, 24, 25, 29, 30; 1994 May 25 Sale of Goods Property, whether passing Unascertained goods Customers purchasing bullion from company on unallocated basis Company in breach of collateral promise to maintain separate stock of bullion Whether property in bullion passing to non allocated claimants Whether property in subsequently acquired bullion passing to claimants Whether claimants having beneficial interest in purchase moneys Whether proprietary restitutionary remedy to be granted New Zealand Sale of goods Property, whether passing Unascer tained goods Customers purchasing bullion on unallocated basis Whether acquiring proprietary interest Sale of Goods Act 1908, s. 18 Estoppel Equitable Proprietary estoppel Company representing customers having title to bullion Whether company estopped from denying customers' title Whether estoppel binding on debenture holder Trusts Constructive trust Sale of goods Transfer of title to purchasers Company misappropriating purchasers' stock of bullion Bank appointing receivers of company Whether purchasers having equitable lien over company's assets Extent of purchasers' tracing remedies 1 A company which dealt in gold and other precious metals sold unascertained bullion to the non-allocated claimants for future delivery. The company's brochure provided that it would be responsible for storing and insuring customers' bullion and that physical delivery of gold and silver could be taken on seven days' notice and payment of nominal delivery charges. Each customer received an invoice or certificate verifying his ownership. The company's employees also told customers that the company would maintain a separate and sufficient stock of each type of bullion to meet their demands, but it failed to do so. The second respondent, having initially purchased specific gold maple coins from the company, agreed to buy a further 1,000 maples on a nonallocated basis and to store all the coins with the company. The company subsequently acquired a substantial quantity of maple coins but not expressly for him. The third respondent represented a category of claimants who had bought bullion from W. Ltd., whose business was subsequently taken over by the company. There was sufficient ascertainment and appropriation of bullion by W. Ltd. to transfer title to each of them, and thereafter they had a shared interest in the pooled bullion stored separately on their behalf. The company unlawfully*75 misappropriated that bullion by mixing it with its own bullion, removing bullion from the mixed stock, and adding more bullion to it without intending to replace the W. Ltd. claimants' bullion. The company got into difficulties and the Bank of New Zealand appointed receivers under the terms of a debenture issued by the company, whereupon the bank's floating charge over the company's assets crystallised. At that time bullion had not been specifically appropriated to the individual purchase contracts of the non-allocated claimants or the second respondent, and the company's assets, including its bullion, were insufficient to satisfy the bank's secured debt. On application to the High Court of New Zealand by the receivers for directions under section 345(1) of the Companies Act in relation to the disposal of the company's remaining stock of bullion, the judge rejected the claims of the non-allocated claimants and the second respondent to proprietary interests in bullion, but allowed the claims of the W. Ltd. claimants although he held that their proprietary recoveries 2011 Thomson Reuters.

63 [1995] 1 A.C. 74 Page 2 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) could not exceed the lowest balance of bullion held by the company between accrual of their rights and commencement of the receivership. The Court of Appeal allowed the appeals of the non-allocated claimants and the second respondent, holding that although they had no proprietary rights to the bullion they had retained a beneficial interest in the purchase moneys paid under the contracts of sale which could be traced into the company's general assets in priority to the bank's charge. Although the W. Ltd. claimants had not appealed to the Court of Appeal it enhanced their remedies by declaring that they were to be in the same position with regard to recovery as the nonallocated claimants and the second respondent. On appeal by the receivers and the bank to the Judicial Committee:- allowing the appeal,(1)that since the non-allocated claimants and the second respondent had contracted to purchase unascertained generic goods no property in any bullion passed to them in law or in equity immediately upon the making of the purchases by virtue of the contracts because a purchaser could not acquire title until it was known to what goods that title related; and that the collateral promises made in the company's brochures and by its employees did not constitute a declaration of trust by the company in favour of the customers in relation to the company's current stock of bullion of the relevant type so as to immediately transfer title to them in respect of that bullion (post, pp. 89E, F-G, 90A, 91C-E, 106D).Dublin City Distillery Ltd. v. Doherty [1914] A.C. 823, H.L.(I.) and In Re Wait [1927] 1 Ch. 606, C.A. distinguished.(2)that although the company had by its collateral promises represented to its customers that they had title to bullion held by the company, it was not estopped from denying their title, because there was no fixed and identified bulk in existence from which a title could be created by a deemed appropriation and, moreover, the company had not represented that it was a bailee of bullion which the customers had agreed to purchase; but that, in any*76 event, such estoppel would not be binding on the bank which on crystallisation of its charge had a proprietary interest in the company's assets unaffected by any prior dealing therewith by the company creating indebtedness of a personal nature, and a purchaser with only a pretended title to goods which did not exist could not take priority over a third party creditor with a real title to actual goods (post, pp. 92E, 93E-F, 94E-H, 106D).Dictum of Brett L.J. in Simm v. Anglo-American Telegraph Co.(1879) 5 Q.B.D. 188, , C.A. applied.knights v. Wiffen (1870) L.R. 5 Q.B. 660 distinguished.(3)that the non-allocated claimants and the second respondent had no proprietary interest in bullion acquired by the company after their contracts of sale had been made since it was impossible to know to which, if any, of their contracts a particular acquisition by the company related, nor had the company purchased coins expressly for the second respondent and appropriated them to his contract; that the collateral promises did not impose on the after-acquired bullion a trust because no separate and sufficient stock of bullion to meet the customers' requirements actually existed, nor had the company been constituted a bailee by the contracts of sale and the collateral promises since it could not be said that whenever the company obtained bullion of a particular description purchasers of the relevant kind of bullion acquired either title or a higher possessory right than the company itself; that, although the existence of a contract did not necessarily preclude one party from owing fiduciary duties to the other, a fiduciary relationship created obligations different in character from those under the contract, and the company was under no obligations other than its contractual ones; but that, in any event, since the company had not established a separate and sufficient stock of bullion, there was nothing to which any proprietary interest could be related, nor could it be attached to the company's remaining stock of bullion or other assets; that despite the company's failure to fulfil its contractual obligations, since it was not required by any express or implied contractual term to set aside all the bullion which it had purchased for the fulfilment of unallocated sale contracts, it had not acted wrongfully in acquiring, maintaining and using its own stock of bullion; and that, therefore, since the company's stock of bullion had no connection with the purchases by the non-allocated claimants 2011 Thomson Reuters.

64 [1995] 1 A.C. 74 Page 3 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) and the second respondent, it would be wrong to declare in their favour a remedial constructive trust, or a restitutionary proprietary interest, over it (post, pp. 95F-G, 96A, G-97A, B-D, E, F-G, 98C-E, F-99B, D, F, 106G-H).In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C. 121 and Mac-Jordan Construction Ltd. v. Brookmount Erostin Ltd. [1992] B.C.L.C. 350, C.A. applied. Holroyd v. Marshall (1862) 10 H.L.Cas. 191, H.L.(E.) distinguished.(4)that as each customer had paid the purchase price solely in order to perform his part of the agreement under which he would eventually be entitled to delivery of bullion, and there was no express or implied provision preventing the company from spending the purchase moneys as it wished or requiring it to use that money to purchase and maintain a separate stock of bullion for the customers, the purchase moneys were not impressed from the outset with a trust in their favour thereby entitling them to trace the moneys into the company's assets, nor was the company*77 a fiduciary as regards the purchase moneys; that since the customers had never rescinded the contracts of sale it was too late for them to contend that the transactions were rendered ineffectual by misrepresentation, mistake or total failure of consideration thus entitling them to a proprietary interest in the purchase moneys or fruits thereof in priority to the bank's interest; that even if the company had misled the customers into buying bullion by misrepresenting that in accordance with its collateral promises it intended to establish a separate stock so that they would obtain a title to bullion, when they paid the purchase price the moneys became the property of the company and rescission would not entitle the customers to a proprietary right superior to the company's other creditors exercisable over all the company's assets, nor would they be so entitled if the purchase moneys had been paid in the mistaken belief that the collateral promises would be performed and a proprietary right established; that, further, there had been no total failure of consideration conferring such a proprietary interest on them; that, although the customers had relied on the company to deliver the bullion and establish a separate stock, the bank had relied on the protection afforded by its floating charge, and the disparity between the parties' positions was not so great that equity should intervene to grant the customers a remedial restitutionary right taking priority over the bank's charge, nor would they be deemed to have retained an equitable title to the purchase moneys (post, pp. 101A-D, 102B-C, D-F, H, 103A-C, G, 104B-D, E- G).(5)That the bullion belonging to the W. Ltd. claimants which was held by the receivers comprised bullion equal to the lowest balance thereof held by the company at any time; that in all the circumstances it would be inequitable to impose a lien in favour of those claimants on all the company's assets at the date of receivership to enable them to recover the value of their bullion unlawfully misappropriated by the company; and that, therefore, they were only entitled to the remedies granted to them by the judge, whose order would be restored (post, pp. 108F-G, 110B, C).James Roscoe (Bolton) Ltd. v. Winder [1915] 1 Ch. 62 applied.decision of the Court of Appeal of New Zealand sub nom. Liggett v. Kensington [1993] 1 N.Z.L.R. 257 reversed. The following cases are referred to in the judgment of their Lordships: Attorney-General for Hong Kong v. Reid [1994] 1 A.C. 324; [1993] 3 W.L.R. 1143; [1994] 1 All E.R. 1, P.C.. Carlos Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd. [1957] 1 Lloyd's Rep. 240 Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105; [1980] 2 W.L.R. 202; [1979] 3 All E.R Commonwealth of Australia v. Verwayen (1990) 95 A.L.R. 321 Diplock, In Re [1948] Ch. 465; [1948] 2 All E.R. 318, C.A.. Dublin City Distillery Ltd. v. Doherty [1914] A.C. 823, H.L.(I.) 2011 Thomson Reuters.

65 [1995] 1 A.C. 74 Page 4 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) Eastgate, In Re; Ex parte Ward [1905] 1 K.B. 465 Holroyd v. Marshall (1862) 10 H.L.Cas. 191, H.L.(E.). Indian Oil Corporation Ltd. v. Greenstone Shipping S.A. (Panama) [1988] Q.B. 345; [1987] 3 W.L.R. 869; [1987] 3 All E.R. 893 James Roscoe (Bolton) Ltd. v. Winder [1915] 1 Ch. 62 Kayford Ltd. (In Liquidation), In Re [1975] 1 W.L.R. 279; [1975] 1 All E.R. 604 Knights v. Wiffen (1870) L.R. 5 Q.B. 660 *78 Laurie and Morewood v. Dudin & Sons [1926] 1 K.B. 223, C.A.. London Wine Co. (Shippers) Ltd., In Re [1986] P.C.C. 121 Mac-Jordan Construction Ltd. v. Brookmount Erostin Ltd. [1992] B.C.L.C. 350, C.A.. Napier and Ettrick (Lord) v. Hunter [1993] A.C. 713; [1993] 2 W.L.R. 42; [1993] 1 All E.R. 385, H.L.(E.). Neste OY v. Lloyds Bank Plc. [1983] 2 Lloyd's Rep. 658 Quistclose Investments Ltd. v. Rolls Razor Ltd. [1970] A.C. 567; [1968] 3 W.L.R. 1097; [1968] 3 All E.R. 651, H.L.(E.). S.E.C. v. Chenery Corporation (1943) 318 U.S. 80 Savage v. Salem Mills Co. (1906) 85 P. 69 Sharpe (A Bankrupt), In Re, Ex parte Trustee of the Bankrupt's Property v. the Bankrupt [1980] 1 W.L.R. 219; [1980] 1 All E.R. 198 Simm v. Anglo-American Telegraph Co. (1879) 5 Q.B.D. 188, C.A.. Sinclair v. Brougham [1914] A.C. 398, H.L.(E.). South Australian Insurance Co. v. Randell (1869) L.R. 3 P.C. 101, P.C.. Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W.L.R. 1072; [1986] 3 All E.R. 75, P.C.. Spence v. Union Marine Insurance Co. Ltd. (1868) L.R. 3 C.P. 427 Wait, In Re [1927] 1 Ch. 606, C.A.. Waltons Stores (Interstate) Pty. Ltd. v. Maher (1988) 164 C.L.R. 387 Whitehouse v. Frost (1810) 12 East 614 The following additional cases were cited in argument: Attorney-General of Hong Kong v. Humphreys Estate (Queen's Gardens) Ltd. [1987] A.C. 114; [1987] 2 W.L.R. 343; [1987] 2 All E.R. 387, P.C.. Banner v. Berridge (1881) 18 Ch.D. 254 Biggerstaff v. Rowatt's Wharf Ltd. [1896] 2 Ch. 93, C.A.. Brady v. Stapleton (1952) 88 C.L.R. 322 Briess v. Woolley [1954] A.C. 333; [1954] 2 W.L.R. 832; [1954] 1 All E.R. 909, H.L.(E.). Burdick v. Garrick (1870) L.R. 5 Ch.App. 233 DHL International (NZ) Ltd. v. Richmond Ltd. (unreported), 7 April 1993, Court of Appeal of New Zealand Docker v. Somes (1834) 2 M. & K Thomson Reuters.

66 [1995] 1 A.C. 74 Page 5 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) Eastern Distributors Ltd. v. Goldring (Murphy, Third Party) [1957] 2 Q.B. 600; [1957] 3 W.L.R. 237; [1957] 2 All E.R. 525, C.A.. El Ajou v. Dollar Land Holdings Plc. [1993] 3 All E.R. 717 Gillett v. Hill (1834) 2 C. & M. 530 Hallett's Estate, In Re (1880) 13 Ch.D. 696, C.A.. Hoare v. Dresser (1859) 7 H.L.Cas. 290, H.L.(E.). Hospital Products Ltd. v. United States Surgical Corporation (1984) 156 C.L.R. 41 Karlshamns Olje Fabriker v. Eastport Navigation Corporation [1982] 1 All E.R. 208 King v. Grieg [1931] V.L.R. 413 Lac Minerals Ltd. v. International Corona Resources Ltd. (1989) 61 D.L.R. (4th) 14 Leigh and Sillavan Ltd. v. Aliakmon Shipping Co. Ltd. [1986] A.C. 785; [1986] 2 W.L.R. 902; [1986] 2 All E.R. 145, H.L.(E.). Madras Official Assignee v. Krishnaji Bhat (1933) 49 T.L.R. 432, P.C.. Martin, In Re; Ex parte Avery Motors Ltd. [1991] 3 N.Z.L.R. 630 Multi Guarantee Co. Ltd., In Re [1987] B.C.L.C. 257, C.A.. Pallant v. Morgan [1953] Ch. 43; [1952] 2 All E.R. 951 Plimmer v. Wellington Corporation (1884) 9 App.Cas. 699, P.C.. *79 Reading v. the King [1949] 2 K.B. 232; [1949] 2 All E.R. 68, C.A.; sub nom. Reading v. Attorney-General [1951] A.C. 507; [1951] 1 All E.R. 617, H.L.(E.). Westdeutche Landesbank Girozentrale v. Islington London Borough Council (1993) 91 L.G.R. 323 Westpac Banking Corporation v. Savin [1985] 2 N.Z.L.R. 41 Whittaker v. Campbell [1984] Q.B. 318; [1983] 3 W.L.R. 676; [1983] 3 All E.R. 582, D.C.. Woodley v. Coventry (1863) 2 H. & C. 164 APPEAL (No. 42 of 1993) with special leave by Bryan Norreys Kensington and John Joseph Cregten (as receivers of Goldcorp Exchange Ltd. (in receivership)) and the Bank of New Zealand from the judgment of the Court of Appeal of New Zealand (Cooke P., Gault J., McKay J. dissenting) given on 30 April 1992 allowing an appeal by the first respondents, the unrepresented nonallocated claimants, and the second respondent, Stephen Paul Liggett, from the judgment of Thorp J. delivered on 17 October 1990 in the High Court of New Zealand refusing to uphold their claim to a proprietary interest in the bullion held by Goldcorp Exchange Ltd. By agreement between the parties there was no appeal to ho represented another class of claimants known as the Walker & Hall claimants. The Court of Appeal had declared that the non-allocated claimants and the second respondent were entitled to charges on the bullion assets of Goldcorp Exchange Ltd. for moneys paid by them to the company and ranking in priority to the bank's charge, and that the Walker & Hall claimants were in the same position to the extent they could not recover under Thorp J.'s judgment. The facts are stated in the judgment of their Lordships. Jonathan Sumption Q.C. and Anthony Paterson (of the New Zealand Bar) for the receivers, and Jonathan Sumption Q.C. and John Moody (of the New Zealand Bar) for the bank. The non-allocated claimants did not acquire property in any metal at law because their contracts were for the sale of unascertained goods. [Reference was made to sections 18 and 20 of the Sale of Goods Act 1908; Gillett v. Hill (1834) 2 C. & M. 530; Benjamin's Sale of Goods, 4th ed. (1992), pp , paras ; pp , paras , 5-069; p. 214, para ; pp , 2011 Thomson Reuters.

67 [1995] 1 A.C. 74 Page 6 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) para ; Karlshamns Olje Fabriker v. Eastport Navigation Corporation [1982] 1 All E.R. 208 and Carlos Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd. [1957] 1 Lloyd's Rep. 240.] In practice property in unascertained goods does not pass until delivery. It is not sufficient for the seller to set aside goods for a particular buyer if it is open to the seller to change his mind. Even if the parties had intended the property to pass immediately on the making of the contracts of sale, until bullion was capable of being appropriated to the contracts it was not ascertained. The non-allocated claimants had no equitable interest in the bullion either. The company's stock was constantly changing, and a customer could not have an equitable interest in something which fluctuated by reason of events beyond his control. Equitable interests could not be created out of the contracts of sale themselves so as to allow the property*80 to pass in equity irrespective of the provisions of the Act of [Reference was made to Hoare v. Dresser (1859) 7 H.L.Cas. 290; In Re Wait [1927] 1 Ch. 606; King v. Grieg [1931] V.L.R. 413; In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C. 121; Leigh and Sillavan Ltd. v. Aliakmon Shipping Co. Ltd. [1986] A.C. 785; In Re Martin, Ex parte Avery Motors Ltd. [1991] 3 N.Z.L.R. 630 and Benjamin's Sale of Goods, 4th ed., pp , para ] The company's brochures did not create an estoppel. There was no representation that any bullion would be appropriated to meet each customer's entitlement, but merely that the bulk would be kept separate to satisfy demands, and so the customer did not acquire title to specific goods. In order to have title a person must be able to point to a specific thing which he owns rather than anyone else. Even if estoppel could arise in relation to the company it would not affect the bank. Estoppel cannot pass title to goods and it does not affect the goods in specie or third parties who derive their title from the true owner. The bank made no representation and has a proprietary right of its own under its charge. The representations made by the company to its customers would not preclude it from giving effect to the bank's rights, and the receivers' position is no different. At the date when the bank's charge crystallised the assets belonged to the company even if for certain purposes it was estopped from denying that they belonged to the customers, and so the bank had a right to those assets. A debenture holder is unaffected by the personal obligations of the chargor. Estoppel can confer no higher right than the contract of sale itself can. [Reference was made to Benjamin's Sale of Goods, 4th ed., pp , para ; Woodley v. Coventry(1863) 2 H. & C. 164; Knights v. Wiffen (1870) L.R. 5 Q.B. 660; Simm v. Anglo- American Telegraph Co.(1879) 5 Q.B.D. 188; Eastern Distributors Ltd. v. Goldring (Murphy, Third Party) [1957] 2 Q.B. 600 and In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C. 121.] The company was beneficially entitled to the purchase moneys because they were the price the customers paid the company for the bullion. The customers did not pay the moneys under a mistake and so did not retain a beneficial interest in them. [Reference was made to Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105 and El Ajou v. Dollar Land Holdings Plc. [1993] 3 All E.R. 717.] The customers were under a contractual obligation to pay. The contracts were valid whether or not the customers were mistaken about the benefits the contracts would give them. The customers never purported to rescind their contracts before the bank's charge attached to the company's assets. The right to rescind a contract on the ground of mistake is governed by statute: see the Contractual Mistakes Act 1977 (No. 54 of 1977). The company was not a trustee of the purchase moneys for the customers. When the receivers were appointed there were simply unperformed contracts of sale. The company was under no obligations other than those derived from the contractual relationship of buyer and seller. [Reference was made to Hospital Products Ltd. v. United States Surgical Corporation (1984) 156 C.L.R. 41.] Mere non-performance of a contract does not amount to failure of consideration so as to give rise to a right of restitution. However, when*81 the company went into receivership it could no longer perform the contract and the customers 2011 Thomson Reuters.

68 [1995] 1 A.C. 74 Page 7 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) could treat it as repudiated. A claim for restitution does not necessarily give rise to a proprietary right, and even if the customers had such a right it would be one which arose after the bank's charge had crystallised. The customers were not entitled to recover the purchase price while the contracts still existed. The right to restitution on a total failure of consideration is, however, a personal and not a proprietary right. [Reference was made to Goff and Jones, The Law of Restitution, 3rd ed. (1986), pp , 373.] The second respondent is in the same position as the non-allocated claimants. His transaction was a sale of unascertained goods. Even if the maples which the company subsequently bought were acquired solely for the purpose of effecting delivery to him if called upon to do so, there was no appropriation of those coins because the company could have sold them to someone else if the second respondent did not give notice of delivery. The judge wrongly found that the Walker & Hall claimants had an interest in the company's stock of bullion. Although there was a physical segregation of bullion from Walker & Hall's own stocks it was impossible to identify specific bullion as belonging to a specific customer. Accordingly, Walker & Hall could do as it wished with the bullion which it held for its customers. [Reference was made to Dublin City Distillery Ltd. v. Doherty [1914] A.C. 823.] The issue of tracing only arises if a proprietary interest is held to exist. Tracing in equity may enable assets to be traced through various identities, but once an asset or its replacement has been dissipated it cannot be traced. If another asset of the same description is subsequently acquired that does not revive the right to trace unless that asset has been obtained in substitution. The Court of Appeal erred on this point and misunderstood Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W.L.R David Baragwanath Q.C., William Akel and Tracey Walker (all of the New Zealand Bar) for the second respondent. The company undertook the role of bailee in relation to the coins the second respondent acquired and was to acquire. The company's obligation was to hold the coins separate from other customers' bullion and in safe custody and to hand them over on demand. By its representation that it held the coins in that manner, the company assumed a fiduciary duty to the second respondent. Equity will not permit the company to assert that the representation was false but will treat as done that which ought to be done: see Attorney-General for Hong Kong v. Reid [1994] 1 A.C In the eyes of equity the maples held at receivership are to be considered as held not for the company itself but on behalf of the second respondent. A floating lien or floating charge applied to the coins when they came into the company's possession. [Reference was made to Burdick v. Garrick(1870) L.R. 5 Ch.App. 233; Banner v. Berridge (1881) 18 Ch.D. 254; Reading v. the King [1949] 2 K.B. 232; [1951] A.C. 507 and In Re Hallett's Estate(1880) 13 Ch.D. 696.] The court will not allow a fiduciary to enrich himself if it would be unconscionable for him to do so. Hospital Products Ltd. v. United States Surgical Corporation, 156 C.L.R. 41 is distinguishable since*82 the contractual terms precluded an implied or a fiduciary obligation from arising. The maples were "ascertained" for the purposes of section 18 of the Act of The whole quantity of maples was required for the second respondent and title therefore passed to him by estoppel. [Reference was made to In Re Wait [1927] 1 Ch. 606, 636.] Section 18 has to be read secundum subjectam materiam. Conduct outside the contract of sale is not deprived of its legal effect by anything in the code of the Act of 1908: see section 60. Section 18 is not to be read so as to prevent the passing of property between the owner of goods and another party in accordance with other principles of law. The principles of proprietary estoppel confer a property right on the second respondent to the extent required to avoid an unconscionable result. The right arises at the time of the transaction and pre-dates the order of the court: In Re Sharpe (A Bankrupt), Ex parte Trustee of the Bankrupt's Property v. the Bankrupt [1980] 1 W.L.R Alternatively, the second respondent had a persistent equitable in Thomson Reuters.

69 [1995] 1 A.C. 74 Page 8 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) terest in the proceeds of the payment. [Reference was made to Goff and Jones, The Law of Restitution, 3rd ed., pp. 78, 373; Neste OY v. Lloyds Bank Plc. [1983] 2 Lloyd's Rep. 658 and In Re Eastgate; Ex parte Ward [1905] 1 K.B. 465.] Tracing arises only in relation to the proprietary right created by estoppel or in relation to the purchase money. [Reference was made to Sir Peter Millett's articles, "Tracing the Proceeds of Fraud" (1991) 107 L.Q.R. 71 and "Bribes and Secret Commissions" [1993] R.L.R. 7, ] The company will not be heard to deny that the maples it acquired in case the second respondent should make demand belong to him. Equity will not permit a fiduciary to say that he has profited from a breach of duty rather than that he has performed the duty. The view in In Re Diplock [1948] Ch. 465, 521, that money paid into an overdrawn account ipso facto ceases to be traceable states the principle too broadly. Equitable principles can be applied to commercial transactions. [Reference was made to Hospital Products Ltd. v. United States Surgical Corporation, 156 C.L.R. 41 and Westpac Banking Corporation v. Savin [1985] 2 N.Z.L.R. 41.] Patrick Finnigan and Julie Maxton (both of the New Zealand Bar) for the non-allocated claimants. The non-allocated claimants were legal co-owners of the bullion in the vaults. [Reference was made to In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C. 121; South Australian Insurance Co. v. Randell(1869) L.R. 3 P.C. 101 and In Re Multi Guarantee Co. Ltd. [1987] B.C.L.C. 257.] Since the company wrongfully intermixed that bullion with its own, if the company cannot show what precisely was the quantum of its contribution to the total the non-allocated claimants have a first claim to it. [Reference was made to Indian Oil Corporation Ltd. v. Greenstone Shipping S.A. (Panama) [1988] Q.B. 345.] The company is estopped from denying that the bullion in the vaults is the property of the nonallocated claimants because of its assertion until the receivership that the bullion belonged to them: see Briess v. Woolley [1954] A.C The courts adopt a favourable attitude towards victims of fraud: see Pallant v. Morgan [1953] Ch. 43 and Brady v. Stapleton (1952) 88 C.L.R. 322.*83 The facts also fit an equitable tenancy in common of a homogeneous whole as recognised in In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C. 121, The company did not retain any dominion over the bullion: see In Re Multi Guarantee Co. Ltd. [1987] B.C.L.C In case of any doubt about the non-allocated claimants' ownership the burden of proof will shift to the company to disprove that the bullion belongs to them. [Reference was made to In Re Hallett's Estate, 13 Ch.D. 696 and Westdeutche Landesbank Girozentrale v. Islington London Borough Council (1993) 91 L.G.R. 323.] The minimum equity required to protect the nonallocated claimants was recognition of their proprietary interest in the bullion in the vaults. The knowledge of the bank was irrelevant. [Reference was made to Plimmer v. Wellington Corporation(1884) 9 App.Cas. 699; Attorney-General of Hong Kong v. Humphreys Estate (Queen's Gardens) Ltd. [1987] A.C. 114; Waltons Stores (Interstate) Pty. Ltd. v. Maher (1988) 164 C.L.R. 387 and Commonwealth of Australia v. Verwayen (1990) 95 A.L.R. 321.] Alternatively, if the knowledge of the bank was a necessary consideration, the bank had such knowledge. Section 345 of the Companies Act 1955, under which the receivers sought directions, entitled the court to adjudicate on the rights of the parties, and the bank was one of the parties. Its conscience was affected and it was bound by the same estoppel as bound the company. The company was in a fiduciary relationship with the non-allocated claimants. If a bailment is proved it is unnecessary to require a fiduciary relationship to be proved as well, but grafted onto the bailment was the fiduciary relationship and so express trust remedies were available. [Reference was made to Docker v. Somes (1834) 2 M. & K. 655; Hospital Products Ltd. v. United States Surgical Corporation, 156 C.L.R. 41; Lac Minerals Ltd. v. International Corona Resources Ltd. (1989) 61 D.L.R. (4 th) 14 and DHL International 2011 Thomson Reuters.

70 [1995] 1 A.C. 74 Page 9 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) (NZ) Ltd. v. Richmond Ltd. (unreported), 7 April 1993.] David Knight (of the New Zealand Bar) for the third respondent. The bank and the receivers are bound to conduct the appeal on the same basis as the appeal to the Court of Appeal was conducted, namely, that a consensual arrangement was entered into by all counsel and the court. [Reference was made to Madras Official Assignee v. Krishnaji Bhat (1933) 49 T.L.R. 432.] The Walker & Hall claimants were co-owners of the fund of bullion held by Walker & Hall on their behalf. Alternatively, Walker & Hall held it on a specific trust for them. Accordingly, the conversion of the bullion, when the company became the shareholder of Walker & Hall, for use as part of the company's trading stock was fraudulent. The intention required to create an express trust must be clear, but no formal or technical words are required: In Re Kayford Ltd. [1975] 1 W.L.R. 279 and Quistclose Investments Ltd. v. Rolls Razor Ltd. [1970] A.C The subject matter of the trust must be clear: contrast In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C The Walker & Hall claimants are entitled to trace into the wrongly mixed bullion fund because (i) the substitute assets were purchased in part from the proceeds of sale of their bullion, (ii) the company intended to*84 restore to them their interest from the replenished stocks of bullion and (iii) it was appropriate that they should have a lien over the total bullion. The contract made by each of the Walker & Hall claimants with Walker & Hall was a contract for the sale of future goods. The goods were specifically acquired and delivered for storage with the claimant's assent and were held by Walker & Hall as custodian. Under section 19 of the Act of 1908 once goods are ascertained the property in them is transferred when the parties intend it to be transferred. The goods were ascertained at the time they were acquired and the delivery was made to the storage area in compliance with the claimant's instructions. The mixing with other clients' bullion did not reverse the earlier ascertainment and passing of property. The storage document was itself constructive delivery because property either passes at the time of appropriation or at a time agreed by the parties. By section 20, rule 5 of the Act property is deemed to be transferred when constructive delivery has taken place. Baragwanath Q.C. resuming. The bank did not acquire any rights in the company's property until the time of receivership. The property that passed to the receivers did not include any interest of the company in the maples because the second respondent had title to them by means of proprietary estoppel. [Reference was made to Biggerstaff v. Rowatt's Wharf Ltd. [1896] 2 Ch. 93.] Alternatively, if the maples were not sufficiently identified and there was no estoppel, there are good grounds for rescission since there was a significant continuing misrepresentation that a specific quantity of maples was being held for the second respondent. The company's rights were therefore diminished by its vulnerability to rescission, and the receivers, who are in a different position from a third party, took subject to that deficiency. The second respondent can elect to rescind the contract at any time until final judgment has been given and claim his rights pursuant to that rescission. Sumption Q.C. in reply. Bailment is not an office which a party assumes but a legal consequence of possessing goods belonging to another person. The essence is the deposit of chattels belonging to someone other than the bailee. It is a necessary precondition of any bailment by a buyer that property should have passed to him under the contract of sale. The second respondent was not misled by the company's representations, which, in any event, could not convert the company into a bailee when there were no goods to be bailed. There cannot be the relationship of bailor and bailee where there is a mass of unascertained goods in respect of some of which the buyer has a contractual right as against the seller. There was no actual bailment although there was an agreement that there should be one. Bailment is a common law relationship and a bailee is not a fiduciary. A bailee may undertake to do something with the goods but, if so, the bailment is only in Thomson Reuters.

71 [1995] 1 A.C. 74 Page 10 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) cidental to what equity would regard as a special purpose trust. The non-allocated claimants cannot not acquire title to unascertained goods by estoppel because the goods cannot be identified. Proprietary estoppel does not apply to sale of goods. [Reference was made to In Re Sharpe (A Bankrupt), Ex parte Trustee of the Bankrupt's Property v. the Bankrupt [1980] 1 W.L.R. 219.]*85 Even if the claimants have been misled by the company they cannot recover the purchase moneys without having rescinded the contract: see Whittaker v. Campbell [1984] Q.B It is not sufficient for them to have the right to rescind in the future because until then the company was entitled to the moneys. The Walker & Hall claimants were not bailees of any identifiable property and there was no ascertainment. Walker & Hall could not pass property to them by declaring itself to be their bailee. In any event, the company would not be bound by any estoppel affecting its predecessor. Unconscionable conduct by the company could not create for the claimants any proprietary interest which the contracts of sale did not. They had no property in any goods and so they cannot be vested with title by virtue of the subsequent admixture by the company. The tracing order made by the Court of Appeal was erroneous and should be set aside. If the Walker & Hall claimants are to have the benefit of the trial judge's decision in their favour on the interest point his decision on the tracing point should be restored. Cur. adv. vult. 25 May The judgment of their Lordships was delivered by LORD MUSTILL. On 11 July 1988 the Bank of New Zealand Ltd. ("the bank") caused receivers to be appointed under the terms of a debenture issued by Goldcorp Exchange Ltd. ("the company"), dealer in gold and other precious metals. The company was then and still remains hopelessly insolvent. Amongst its assets is a stock of gold, silver and platinum bullion. Even if the company had not been brought down by dealings unconnected with bullion this stock would have been far short of what was needed to satisfy numerous contracts under which members of the public had purchased precious metals for future delivery. The discovery that not only was there a shortfall in available bullion but also that the stock of bullion had been dealt with internally in a manner quite different from what had been promised by the vendors in their promotional literature has aroused great indignation amongst the members of the public (more than 1,000) whose faith in the promises made by the vendors has proved to be misplaced. These feelings were exacerbated when it was realised that the debt secured by the debenture and the floating charge which it created were in excess of the entire assets of the company, including the stocks of bullion, so that if the secured interest of the bank is satisfied in preference to the claims of the purchasers, the latter will receive nothing at all. This has impelled the private investors (hereafter collectively referred to as "the customers") to assert in the liquidation of the company, not their unanswerable personal claims against the company for damages or for the repayment of sums paid in advance, but claims of a proprietary nature; in the first instance as regards the remaining stock of bullion, and at a later stage of the litigation asserted by reference to the moneys paid under the various purchase contracts, or to a proportion of the company's general assets seen as representing the moneys so paid.*86 In response, the receivers applied to the High Court under section 345 of the Companies Act 1955 for directions concerning the disposal of the remaining bullion. They have pursued proceedings of great complexity, very skilfully marshalled by Thorp J. in such a manner as to enable decisions to be given in principle with regard to various categories of customer and thus to minimise the inevitable cost and delay involved in the investigation of so many and diverse claims. The outcome has been the settlement, or disposal by court decisions against which there is no appeal, of claims by several types of customer. There re Thomson Reuters.

72 [1995] 1 A.C. 74 Page 11 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) main three categories, forming the subject matter of the present appeal. The first and largest category comprises the first respondents, those customers who have come to be known as "nonallocated claimants." These were customers who had purchased bullion for future delivery. At the time when the bank's floating charge crystallised upon the appointment of receivers, there had not been any appropriation of specific and segregated parcels of bullion to the individual purchase contracts. The second category of claimant has only one member, namely the second respondent Mr. S. P. Liggett, whose case resembles that of the non-allocated claimants but has certain additional features upon which he relies to contend that his claim will succeed even if the rights of the nonallocated claimants are subordinated to those of the bank. The third category of claimant consists of those who had made contracts for the purchase of bullion from Walker & Hall Commodities Ltd. before the business of that company was acquired by the company in In the High Court all the claims were founded on the proposition that the customers had, or must be deemed to have, proprietary interests in bullion which could be traced into the stock remaining on liquidation. Thorp J. rejected the claims of the non-allocated claimants and of the second respondent (save in one respect which is not directly before the Board), but allowed the claims of the Walker & Hall claimants. In the case of the latter the judge limited the amount of the remedy by reference to a question of tracing to which their Lordships must later refer. On appeal, the Court of Appeal [1993] 1 N.Z.L.R. 257 agreed with Thorp J. in holding that the first two categories of customer had no proprietary rights to the bullion. The scope of the debate was, however, enlarged to embrace a new claim to a proprietary remedy related directly or indirectly to the original payments of price by the customers under the purchase contracts. On this part of the appeal the court was divided in opinion. Cooke P. and Gault J. found in favour of the non-allocated claimants and second respondent, albeit for reasons which were not identical, and went on to hold that the entire amount of the purchase moneys could be traced into the general assets of the company. McKay J. rejected this basis of claim. The position as regards the Walker & Hall claimants was the subject of procedural complications which their Lordships must later describe. The receivers and the bank have appealed to the Board in relation to all three categories of customer. Non-allocated claimantsi. The facts Dealings in gold coins and ingots as consumer products are a comparative innovation in New Zealand. In the forefront of developing*87 the market was a predecessor of Goldcorp Exchange Ltd. (Details of the alterations in the management and corporate structure of the concerns which acted as vendors in the transactions giving rise to the present litigation are complex, but they are not material to the issues now before the Board, and it is convenient to refer simply to "the company.") Although the course of business between the company and the non-allocated claimants was not wholly consistent, and the documents varied somewhat from time to time, the general shape of the business was always as follows. Sales were promoted in various ways, particularly through glossy, illustrated brochures. So far as presently material the brochures offered two methods of purchasing bullion: "The first is what we call physical delivery and the second is non-allocated metal." After explaining how purchases of granules, ingots and coins could be made for physical delivery a typical brochure described the procedure for purchasing non-allocated metal, which (it was said) was "preferred by the majority of investors and... recognised as the most convenient and safe way of purchasing metal." According to this brochure: "Basically, you agree to buy metal at the prevailing market rate and a paper transaction takes place. [The company] is responsible for storing and insuring your metal free of charge and you are given a 'non-allocated invoice' which verifies your ownership of the metal. In the case of gold or silver, physical delivery can be taken upon seven days notice and payment of nominal deliv Thomson Reuters.

73 [1995] 1 A.C. 74 Page 12 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) ery charges." A later version of the brochure said: "Basically, you agree to buy and sell as with physical bullion, but receive a certificate of ownership rather than the metal. The metal is stored in a vault on your behalf.... "What protection have I that Goldcorp will deliver? "The metal stocks of Goldcorp are audited monthly by Peat Marwick, to ensure there are sufficient stocks to meet all commitments." If a member of the public decided to make a purchase on the non-allocated basis he or she received a certificate stating: "This is a certificate for non-allocated metal stored and insured by [the company]. Delivery may be taken within seven days upon payment of delivery charges." Later, the certificate was altered so as to read: "This is to certify that [name] is the registered holder of [quantity] fine gold. The above metal is stored and insured free of charge by Goldcorp Exchange Ltd. on a non-allocated basis. Delivery may be taken upon seven days' notice and payment of delivery charges. The owner shall be entitled to the collection of the bullion, or funds from the sale of bullion, only upon presentation of this certificate." In addition to the documentation there were of course preliminary discussions between the customer and the company. Whilst these varied in detail from one occasion to another the following general description*88 by McKay J. [1993] 1 N.Z.L.R. 257, , was accepted as correct for the purposes of argument: "The wording makes it clear that the investor is not merely depositing money or acquiring a contractual right to be supplied at some later date after giving seven days' notice. The wording describes an actual purchase of gold or silver which will then be stored free of charge and insured by Exchange. Delivery is available on seven days' notice and on payment of a small fee for ingotting. This suggests that although there will be physical bullion held in storage for the investor and insured for him, it will be part of a larger bulk and will require ingotting before he can take delivery of his specific entitlement. In the meantime, he will have an interest, along with other investors, in the bulk which is being held and stored by Exchange for him and for other investors. "That certainly was the perception of investors. As the judge said: 'No one could read the claimants' affidavits, still less hear the evidence given by them on cross-examination, without being convinced of the depth and genuineness of their belief that by accepting the invitation to purchase on a non-allocated basis they were not simply buying "gilt edged investments," but gold itself. The speed and strength of their reaction to advice that Exchange had not stored bullion sufficient to cover their "bullion certificates" made that plain.' In an appendix to his submissions on behalf of the non-allocated claimants Mr. Finnigan collected numerous extracts from the affidavits filed on their behalf. These amply support the judge's finding. They depose to the various statements made to them on behalf of Exchange, all emphasising the absence of security problems, the fact that their bullion would be stored in safe keeping and would be safer than if they took delivery of it, the risks of storing bullion at one's own home, and the safety and security offered by storage with Exchange. Verbal assurances were also given that not only was the bullion insured, but the metal stocks were audited monthly by a large and respected firm of chartered accountants. Some deponents relied particularly on this factor as a guarantee that there would always be sufficient bullion to cover all the certificates issued by Exchange as was indicated in its brochures. Others refer to correspondence with Exchange which reinforced their belief that their metal was physically stored in vaults on their behalf. A number of investors received letters in connection with Exchange's audit asking them to confirm 'the amount of non-allocated bullion we hold on your behalf as at 31 March.'... Exchange's evidence as to what investors were told is more consistent with Exchange's brochures and with the evidence of investors. Mr. Campbell, who was bullion manager from January 1984 until the receiver Thomson Reuters.

74 [1995] 1 A.C. 74 Page 13 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) ship, said at para. 7.2 that it was invariably explained to the non-allocated investors that the bullion purchased 'was not set aside as that person's metal, but instead was stored as part of the company's overall stock of bullion,' that 'the bullion was stored and insured by the company,' and as to safe keeping that 'they would not have to worry about security problems of storing the bullion in their own homes.' This suggests that the bullion would be*89 stored in bulk rather than on an allocated basis, but that it would be physically stored and held safely for the investor."ii. The issues As already seen, by the time the judgment in the Court of Appeal [1993] 1 N.Z.L.R. 257 had been delivered the proprietary claims of the customers had been widened to comprise not only bullion but also the general assets of the company, to an extent representing the sums originally paid by way of purchase price. The following issues now arise for consideration. (i) Did the property in any bullion pass to the customers immediately upon the making of the purchases - (a) simply by virtue of contract of purchase itself, or (b) by virtue of the written and oral statements made in the brochures and by the company's employees? (Although these were referred to in argument as representations their Lordships believe them to be more in the nature of contractual undertakings, and therefore call them "the collateral promises"). (ii) Did the property in any bullion subsequently acquired by the company pass to the customer upon acquisition? (iii) When the customers paid over the purchase moneys under the contract of sale, did they retain a beneficial interest in them by virtue of an express or constructive trust? (iv) Should the court now grant a restitutionary remedy of a proprietary character in respect of the purchase moneys? If the answer to any of these questions is in the affirmative it will be necessary to consider the extent to which the customer's rights in the relevant subject matter can be applied to the bullion or other assets now in the possession of the company.iii. Title to bullion: the sale contracts Their Lordships begin with the question whether the customer obtained any form of proprietary interest, legal or equitable, simply by virtue of the contract of sale, independently of the collateral promises. In the opinion of their Lordships the answer is so clearly that he did not that it would be possible simply to quote section 18 of the Sale of Goods Act 1908 (New Zealand) (corresponding to section 16 of the Sale of Goods Act 1893 (56 & 57 Vict. c. 71)) and one reported case, and turn to more difficult issues. It is, however, convenient to pause for a moment to consider why the answer must inevitably be negative, because the reasons for this answer are the same as those which stand in the way of the customers at every point of the case. It is common ground that the contracts in question were for the sale of unascertained goods. For present purposes, two species of unascertained goods may be distinguished. First, there are "generic goods." These are sold on terms which preserve the seller's freedom to decide for himself how and from what source he will obtain goods answering the contractual description. Secondly, there are "goods sold ex-bulk." By this expression their Lordships denote goods which are by express stipulation to be supplied from a fixed and a predetermined source, from within which the seller may make his own choice (unless the contract requires it to be made in some other way) but outside which he may not go. For example, "I sell you 60 of the 100 sheep now on my farm."*90 Approaching these situations a priori common sense dictates that the buyer cannot acquire title until it is known to what goods the title relates. Whether the property then passes will depend upon the intention of the parties and in particular on whether there has been a consensual appropriation of particular goods to the contract. On the latter question the law is not straightforward, and if it had been decisive of the present appeal it would have been necessary to examine cases such as Carlos Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd. [1957] 1 Lloyd's Rep. 240 and other cases cited in argument. In fact, however, the case turns not on appropriation but on ascertainment, and on the latter the law has never been in doubt. It makes no difference what the parties in Thomson Reuters.

75 [1995] 1 A.C. 74 Page 14 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) tended if what they intend is impossible: as is the case with an immediate transfer of title to goods whose identity is not yet known. As Lord Blackburn wrote in his treatise on The Effect of the Contract of Sale (1845), pp , a principal inspiration of the Sale of Goods Act 1893: "The first of [the rules] that the parties must be agreed as to the specific goods on which the contract is to attach before there can be a bargain and sale, is one that is founded on the very nature of things. Till the parties are agreed on the specific individual goods, the contract can be no more than a contract to supply goods answering a particular description, and since the vendor would fulfil his part of the contract by furnishing any parcel of goods answering that description, and the purchaser could not object to them if they did answer the description, it is clear there can be no intention to transfer the property in any particular lot of goods more than another, till it is ascertained which are the very goods sold. "This rule has existed at all times; it is to be found in the earliest English law books.... It makes no difference, although the goods are so far ascertained that the parties have agreed that they shall be taken from some specified larger stock. In such a case the reason still applies: the parties did not intend to transfer the property in one portion of the stock more than in another, and the law which only gives effect to their intention, does not transfer the property in any individual portion." Their Lordships have laboured this point, about which there has been no dispute, simply to show that any attempt by the non-allocated claimants to assert that a legal title passed by virtue of the sale would have been defeated, not by some arid legal technicality but by what Lord Blackburn called "the very nature of things." The same conclusion applies, and for the same reason, to any argument that a title in equity was created by the sale, taken in isolation from the collateral promises. It is unnecessary to examine in detail the decision of the Court of Appeal in In Re Wait [1927] 1 Ch. 606 for the facts were crucially different. There, the contract was for a sale ex-bulk. The 500 tons in question formed part of a larger quantity shipped on board a named vessel; the seller could supply from no other source; and once the entire quantity had been landed and warehoused the buyer could point to the bulk and say that his goods were definitely there, although he could not tell which part they were. It*91 was this feature which prompted the dissenting opinion of Sargant L.J. that the sub-purchasers had a sufficient partial equitable interest in the whole to found a claim for measuring out and delivery of 500 tons. No such feature exists here. Nevertheless, the reasoning contained in the judgment of Atkin L.J., at pp , which their Lordships' venture to find irresistible, points unequivocally to the conclusion that under a simple contract for the sale of unascertained goods no equitable title can pass merely by virtue of the sale. This is not, of course, the end of the matter. As Atkin L.J. himself acknowledged, at p. 636: "[The rules in the statute] have, of course, no relevance when one is considering rights, legal or equitable, which may come into existence dehors the contract for sale. A seller or a purchaser may, of course, create any equity he pleases by way of charge, equitable assignment or any other dealing with or disposition of goods, the subject matter of sale; and he may, of course, create such an equity as one of the terms expressed in the contract of sale." Their Lordships therefore turn to consider whether there is anything in the collateral promises which enables the customers to overcome the practical objections to an immediate transfer of title. The most direct route would be to treat the collateral promises as containing a declaration of trust by the company in favour of the customer. The question then immediately arises - What was the subject matter of the trust? The only possible answer, so far as concerns an immediate transfer of title on sale, is that the trust related to the company's current stock of bullion answering the contractual description; for there was no other bullion to which the trust could relate. Their Lordships do not doubt that the vendor of goods sold ex-bulk can effectively declare himself trustee of the bulk in favour of the buyer, so as to confer pro tanto an equitable title. But the present trans Thomson Reuters.

76 [1995] 1 A.C. 74 Page 15 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) action was not of this type. The company cannot have intended to create an interest in its general stock of gold which would have inhibited any dealings with it otherwise than for the purpose of delivery under the non-allocated sale contracts. Conversely the customer, who is presumed to have intended that somewhere in the bullion held by or on behalf of the company there would be stored a quantity representing "his" bullion, cannot have contemplated that his rights would be fixed by reference to a combination of the quantity of bullion of the relevant description which the company happened to have in stock at the relevant time and the number of purchasers who happened to have open contracts at that time for goods of that description. To understand the transaction in this way would be to make it a sale of bullion ex-bulk, which on the documents and findings of fact it plainly was not. Nor is the argument improved by reshaping the trust, so as to contemplate that the property in the res vendita did pass to the customer, albeit in the absence of delivery, and then merged in a general equitable title to the pooled stock of bullion. Once again the argument contradicts the transaction. The customer purchased for the physical delivery on demand of the precise quantity of bullion fixed by his contract, not a shifting proportion of a shifting bulk, prior to delivery. It is of course*92 true that a vendor may agree to retain physical possession of the goods on behalf of his purchaser after the sale has been completed, and that there may be a constructive delivery and redelivery of possession, so as to transform the vendor into a bailee or pledgee without the goods actually changing hands: see per Lord Atkinson in Dublin City Distillery Ltd. v. Doherty [1914] A.C. 823, 844. Lord Atkinson was there contemplating a situation, such as existed in the Dublin City case itself, where the goods held in the warehouse were already identified (by numbers on the casks: see p. 825), so that the contract was one for the sale of specific goods under which the property would pass at once to the vendee. The case is, however, quite different where the sale is of generic goods. Even if the present contract had been a sale ex-bulk, in the sense that the contractual source was the bulk of bullion in the store, section 18 of the Act of 1908 would have prevented the property from passing on sale: see Laurie and Morewood v. Dudin & Sons [1926] 1 K.B. 223 and Whitehouse v. Frost (1810) 12 East 614. The present case is even more clear, since the customers contracted to purchase generic goods without any stipulation as to their source. The next group of arguments for the non-allocated claimants all turn on an estoppel, said to derive from the collateral promises. Their Lordships derive no assistance from cases such as Waltons Stores (Interstate) Pty Ltd. v. Maher (1988) 164 C.L.R. 387 and Commonwealth of Australia v. Verwayen (1990) 95 A.L.R. 321 which show that on occasion a party may estop himself from relying on the protection of the statute. No such estoppel could assist the customers here, for the problem facing them at every turn is not section 18 of the Sale of Goods Act 1908, but the practical reality underlying it which Lord Blackburn called "the very nature of things:" namely that it is impossible to have a title to goods, when nobody knows to which goods the title relates. The same objection rules out reliance on cases such as In Re Sharpe (A Bankrupt), Ex parte Trustee of the Bankrupt's Property v. the Bankrupt [1980] 1 W.L.R. 219 concerning what is called a proprietary estoppel. A more plausible version of the argument posits that the company, having represented to its customers that they had title to bullion held in the vaults, cannot now be heard to say that they did not. At first sight this argument gains support from a small group of cases, of which Knights v. Wiffen (1870) L.R. 5 Q.B. 660 is the most prominent. Wiffen had a large quantity of barley lying in sacks in his granary, close to a railway station. He agreed to sell 80 quarters of this barley to Maris, without appropriating any particular sacks. Maris sold 60 quarters to Knights, who paid for them and received in exchange a document signed by Maris addressed to the station master, directing him to deliver 60 quarters of barley. This was shown by the station master to Wiffen who told him that when he got the forwarding note the barley would be put on the line. Knights gave a forwarding note to the station master for 2011 Thomson Reuters.

77 [1995] 1 A.C. 74 Page 16 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) 60 quarters of barley. Maris became bankrupt, and Wiffen, as unpaid vendor, refused to part with the barley. Knights sued Wiffen in trover to which Wiffen pleaded that the barley was not the property of the plaintiff. A very strong court of Queen's Bench found in favour of the plaintiff. Blackburn J. explained the matter thus, at pp : "No doubt the law is that until an appropriation from a bulk is made, so that the vendor has said what portion belongs to him and*93 what portion belongs to the buyer, the goods remain in solido, and no property passes. But can Wiffen here be permitted to say, 'I never set aside any quarters?'... The defendant knew that, when he assented to the delivery order, the plaintiff, as a reasonable man, would rest satisfied.... The plaintiff may well say, 'I abstained from active measures in consequence of your statement, and I am entitled to hold you precluded from denying that what you stated was true.' " There may perhaps be a shadow over this decision, notwithstanding the high authority of the court: see the observations of Brett L.J. in Simm v. Anglo-American Telegraph Co.(1879) 5 Q.B.D. 188, 212. Assuming that the decision was nevertheless correct the question is whether it applies to the present case. Their Lordships consider that, notwithstanding the apparent similarities, it does not. The agreement for sale in Knights v. Wiffen, L.R. 5 Q.B. 660, was a sale ex-bulk, or at least it must have been seen as such, for otherwise Blackburn J.'s judgment would have contradicted his treatise in the passage above quoted. On this view, the bulk was the whole of the stock in Wiffen's warehouse. This stock was therefore committed to the purchase to the extent that Wiffen could not properly have sold the whole of it without making delivery of part to his buyer. Another and more important aspect of the same point is that the bulk actually existed. The effect of Wiffen's representation was to preclude him from denying to the sub-purchaser, Knights, that he had made a sufficient appropriation from the fixed and identified bulk to give the intermediate purchaser, and hence Knights himself, the proprietary interest sufficient to found a claim in trover. The present case is quite different, for there was no existing bulk and therefore nothing from which a title could be carved out by a deemed appropriation. The reasoning of Knights v. Wiffen does not enable a bulk to be conjured into existence for this purpose simply through the chance that the vendor happens to have some goods answering the description of the res vendita in its trading stock at the time of the sale - quite apart, of course, from the fact that if all the purchasers obtained a deemed title by estoppel there would not be enough bullion to go around. All this aside, there is another reason why the argument founded on estoppel cannot prevail. The answer is given by Mellor J. in Knights v. Wiffen itself, where, quoting from Blackburn's Contract of Sale, p. 162 he says, at pp : "This is a rule [i.e. the estoppel], which, within the limits applied by law, is of great equity; for when parties have agreed to act upon an assumed state of facts, their rights between themselves are justly made to depend on the conventional state of facts and not on the truth. The reason of the rule ceases at once when a stranger to the arrangement seeks to avail himself of the statements which were not made as a basis for him to act upon. They are for a stranger evidence against the party making the statement, but no more than evidence which may be rebutted; between the parties they form an estoppel in law."*94 Later, Brett L.J. was to observe in Simm v. Anglo- American Telegraph Co., 5 Q.B.D. 188, : "it seems to me that an estoppel gives no title to that which is the subject matter of estoppel. The estoppel assumes that the reality is contrary to that which the person is estopped from denying, and the estoppel has no effect at all upon the reality of the circumstances.... a person may be estopped from denying that certain goods belong to another; he may be compelled by a suit in the nature of an action of trover to deliver them up, if he has them in his possession and under his control; but if the goods, in respect of which he has estopped himself, really belonged to somebody else, it seems impossible to suppose that... he can be compelled to deliver over another's goods 2011 Thomson Reuters.

78 [1995] 1 A.C. 74 Page 17 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) to the person in whose favour the estoppel exists against him... that person cannot recover the goods, because no property has really passed to him, he can recover only damages. In my view estoppel... only creates a cause of action between the person in whose favour the estoppel exists and the person who is estopped." Similar statements can be found in several texts, such as for example Palmer on Bailment, 2nd ed. (1991), p To this the customers respond that they are not obliged to assert the same proprietary interest against the bank as they would do if their opponents were strangers to the entire relationship. By taking a floating rather than an immediate fixed charge the bank accepted the risk of adverse dealings by the company with its assets, and when the charge crystallised the bank "stood in the shoes" of the company, taking those assets with all the detrimental features which the company had attached to them. If the estoppel binds the company, then it must bind the bank as well. Attractive as this argument has been made to seem, their Lordships cannot accept it. The chargee does not become on the crystallisation of the charge the universal successor of the chargor, in the same way as the trustee in bankruptcy or personal representative, who is as much subject to the personal claims of third parties against the insolvent as he is entitled to the benefit of personal claims of which the insolvent is the obligee. Rather, the chargee becomes entitled to a proprietary interest which he asserts adversely to the company, personified by the liquidator and all those general creditors who share in the assets of the company. The freedom of the chargor to deal with its assets pending the crystallisation of the charge does not entail that the chargee's right to the assets is circumscribed by an indebtedness of a purely personal nature. The most that the Knights v. Wiffen, L.R. 5 Q.B. 660, line of authority can give to the purchaser is the pretence of a title where no title exists. Valuable as it may be where one party to the estoppel asserts as against the other a proprietary cause of action such as trover, this cannot avail the purchaser in a contest with a third party creditor possessing a real proprietary interest in a real subject matter, whereas the purchaser has no more than a pretence of a title to a subject matter which does not actually exist. Similar obstacles stand in the way of a more elaborate version of the same argument. This seeks to combine two principles: the first that a*95 person who represents (by attornment or otherwise) that he has goods in his possession which he holds for a third party is in certain circumstances precluded from denying to that third party that he does so possess and hold the goods even if in fact he does not; the second that a bailee of goods is precluded, as against the bailor, from denying that the bailor has a good title. The result is said to be that by acknowledging itself to be a bailee the company gave its customers a good title to that which they had agreed to purchase. Whilst acknowledging the ingenuity of this argument their Lordships are unable to accept it. If correct, it would entail that a customer, who chose to bring a proprietary action (such as trover, under the former law) rather than simply claiming damages for non-delivery would be entitled to an order for delivery up of the goods which he had purchased. But which goods? Not a portion of the goods in store, for there was no representation and the customers cannot have believed that it was from these goods alone that by a process of separation their own orders would be fulfilled. and if not these goods, there were no others to which the title could attach since the source of supply was completely at large. Their Lordships must also reject a further variant of the argument, whereby a trust in respect of bullion came into existence as an aspect of a bailment, so that even if title stricto sensu did not pass nevertheless the fruits of the breach of trust may be traced into the existing stock of bullion. In other circumstances it might be necessary to look more closely at those elements of the argument which seek to attach the characteristics of a trust to a relationship of bailment, which does not ordinarily have this character, and also at the feasibility of tracing. There is no need for this, however, since there was never any bailment, and no identifiable property to which any trust could 2011 Thomson Reuters.

79 [1995] 1 A.C. 74 Page 18 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) attach.iv. Title to after-acquired bullion Having for these reasons rejected the submission that the non-allocated claimants acquired an immediate title by reason of the contract of sale and the collateral promises their Lordships turn to the question whether the claimants later achieved a proprietary interest when the company purchased bullion and put it into its own stock. Broadly speaking, there are two forms which such an argument might take. According to the first, the contracts of sale were agreements for the sale of goods afterwards to be acquired. It might be contended that quite independently of any representation made by the company to the non-allocated claimants, as soon as the company acquired bullion answering the contractual description the purchaser achieved an equitable title, even though the passing of legal title was postponed until the goods were ascertained and appropriated at the time of physical delivery to the purchaser. In the event this argument was not separately pursued, and their Lordships mention it only by way of introduction. They will do so briefly, since it was bound to fail. The line of old cases, founded on Holroyd v. Marshall (1862) 10 H.L.Cas. 191 and discussed in Benjamin's Sale of Goods, 3rd ed. (1987), pp. 80, , paras. 106 and 357, which might be said to support it, was concerned with situations where the goods upon acquisition could be unequivocally identified with the*96 individual contract relied upon. As Lord Hanworth M.R. demonstrated in In Re Wait [1927] 1 Ch. 606, 622, the reasoning of these cases cannot be transferred to a situation like the present where there was no means of knowing to which, if any, of the non-allocated sales a particular purchase by the company was related. Since this objection on its own is fatal, there is no need to discuss the other obstacles which stand in its way. The second category of argument asserts, in a variety of forms, that the collateral promises operated to impress on the bullion, as and when it was acquired by the company, a trust in favour of each purchaser. Before looking at the arguments in detail it is necessary to mention a problem which is very little discussed in the judgments and arguments. It will be seen that the analysis to date has involved two markedly different assumptions. The first relates to the expectation of the customer in the light of the collateral promises. The customer is assumed to have believed that it would make no difference whether he took immediate delivery of the bullion and put it in a bank, or left it with the company - except that in the latter case he would avoid the trouble, risk and expense of storage. In law this expectation could be fulfilled only by a system under which the company obtained bullion either by an outside purchase or by transfer from its own stock, and immediately stored it separately in the name of the customer, leaving it untouched until the moment of delivery or re-purchase. The second assumption relates to the obligations which the company actually undertook. It has not been suggested that this matched the customer's expectation, for there is nothing in the collateral promises, either written or oral, entitling the customer to separate and individual appropriation of goods. Instead, as shown by the passage already quoted from the judgment of McKay J. [1993] 1 N.Z.L.R. 257, , the arguments proceed on the basis that the company promised to maintain bullion, separate from its own trading stock, which would in some way stand as security, or reassurance, that the bullion would be available when the customer called for delivery. But what kind of security or reassurance? If the scheme had contemplated that, properly performed, it would have brought about a transfer of title to the individual customer before that customer's appropriated bullion was mixed in the undifferentiated bulk, analogies could have been drawn with decisions such as Spence v. Union Marine Insurance Co. Ltd.(1868) L.R. 3 C.P. 427, South Australian Insurance Co. v. Randell(1869) L.R. 3 P.C. 101, Indian Oil Corporation Ltd. v. Greenstone Shipping S.A. (Panama) [1988] Q.B. 345, and the United States silo cases of which Savage v. Salem Mills Co. (1906) 85 P. 69 is an example. Since, however, even if the company had performed its obligations to the full there would have been no transfer of title to the purchaser before admixture, these cases are not in point. The only remaining 2011 Thomson Reuters.

80 [1995] 1 A.C. 74 Page 19 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) alternative, consistently with the scheme being designed to give the customer any title at all before delivery, is that the company through the medium of the collateral promises had declared itself a trustee of the constantly changing undifferentiated bulk of bullion which should have been set aside to back the customers' contracts. Such a trust might well be feasible in theory, but their Lordships find it hard to reconcile with the practicalities of the scheme, for it would seem to involve that the separated bulk would become the source from which alone the sale contracts were *97 to be supplied: whereas, as already observed, it is impossible to read the collateral promises as creating a sale ex-bulk. This being so, whilst it is easy to see how the company's failure to perform the collateral obligations has fuelled the indignation created by its failure to deliver the bullion under the sales to non-allocated purchasers, their Lordships are far from convinced that this particular breach has in fact made any difference. Let it be assumed, however, as did McKay J. [1993] 1 N.Z.L.R. 257, 284 in his dissenting judgment, that the creation of a separate and sufficient stock would have given the non-allocated purchasers some kind of proprietary interest, the fact remains that the separate and sufficient stock did not exist. The customers' first response to this objection is that even if the concept of an immediate trust derived from a bailment arising at the time of the original transactions cannot be sustained, the collateral promises created a potential or incomplete or (as it was called in argument) "floating" bailment, which hovered above the continuing relationship between each purchaser and the company, until the company bought and took delivery of bullion corresponding to the claimant's contract, whereupon the company became bailee of the bullion on terms which involved a trust in favour of the purchaser. Their Lordships find it impossible to see how this ingenious notion, even if feasible in principle, could be put into practice here, given that the body of potential beneficiaries was constantly changing as some purchasers called for and took delivery whilst others came newly on the scene, at the same time as the pool of available bullion waxed and waned (sometimes to zero as regards some types of bullion) with fresh deliveries and acquisitions. Even if this is left aside, the concept simply does not fit the facts. True, there is no difficulty with a transaction whereby B promises A that if in the future goods belonging to A come within the physical control of B he will hold them as bailee for A on terms fixed in advance by the agreement. But this has nothing to do with a trust relationship, and it has nothing to do with the present case, since in the example given A has both title to the goods and actual or constructive possession of them before their receipt by B, whereas in the present case the non-allocated claimants had neither. The only escape would be to suggest that every time the company took delivery of bullion of a particular description all the purchasers from the company of the relevant kind of bullion acquired both a higher possessory right than the company (for such would be essential if the company was to be a bailee) and a title to the goods, via some species of estoppel derived from this notional transfer and retransfer of possession. Their Lordships find it impossible to construct such a contorted legal relationship from the contracts of sale and the collateral promises. Next, the claimants put forward an argument in two stages. First, it is said that because the company held itself out as willing to vest bullion in the customer and to hold it in safe custody on behalf of him in circumstances where he was totally dependent on the company, and trusted the company to do what it had promised without in practice there being any means of verification, the company was a fiduciary. From this it is deduced that the company as fiduciary created an equity by inviting*98 the customer to look on and treat stocks vested in it as his own, which could appropriately be recognised only by treating the customer as entitled to a proprietary interest in the stock. To describe someone as a fiduciary, without more, is meaningless. As Frankfurter J. said in S.E.C. v. Chenery Corporation (1943) 318 U.S Thomson Reuters.

81 [1995] 1 A.C. 74 Page 20 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) 80, , cited in Goff and Jones, The Law of Restitution, 4th ed. (1993), p. 644: "To say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? and what are the consequences of his deviation from duty?" Here, the argument assumes that the person towards whom the company was fiduciary was the nonallocated claimant. But what kind of fiduciary duties did the company owe to the customer? None have been suggested beyond those which the company assumed under the contracts of sale read with the collateral promises; namely to deliver the goods and meanwhile to keep a separate stock of bullion (or, more accurately, separate stocks of each variety of bullion) to which the customers could look as a safeguard for performance when delivery was called for. No doubt the fact that one person is placed in a particular position vis-à-vis another through the medium of a contract does not necessarily mean that he does not also owe fiduciary duties to that other by virtue of being in that position. But the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself. Their Lordships have not heard in argument any submission which went beyond suggesting that by virtue of being a fiduciary the company was obliged honestly and conscientiously to do what it had by contract promised to do. Many commercial relationships involve just such a reliance by one party on the other, and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences far exceeding those foreseen by Atkin L.J. in In Re Wait [1927] 1 Ch It is possible without misuse of language to say that the customers put faith in the company, and that their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies. Let it be assumed, however, that the company could properly be described as a fiduciary and let it also be assumed that notwithstanding the doubts expressed above the non-allocated claimants would have achieved some kind of proprietary interest if the company had done what it said. This still leaves the problem, to which their Lordships can see no answer, that the company did not do what it said. There never was a separate and sufficient stock of bullion in which a proprietary interest could be created. What the nonallocated claimants are really trying to achieve is to attach the proprietary interest, which they maintain should have been created on the nonexistent stock, to wholly different assets. It is understandable that the claimants, having been badly let down in a transaction concerning bullion should believe that they must have rights*99 over whatever bullion the company still happens to possess. Whilst sympathising with this notion their Lordships must reject it, for the remaining stock, having never been separated, is just another asset of the company, like its vehicles and office furniture. If the argument applies to the bullion it must apply to the latter as well, an obviously unsustainable idea. Finally, it is argued that the court should declare in favour of the claimants a remedial constructive trust, or to use another name a restitutionary proprietary interest, over the bullion in the company's vaults. Such a trust or interest would differ fundamentally from those so far discussed, in that it would not arise directly from the transaction between the individual claimants, the company and the bullion, but would be created by the court as a measure of justice after the event. Their Lordships must return to this topic later when considering the Walker & Hall claimants who, the trial judge has held, did acquire a proprietary interest in some bullion, but they are unable to understand how the doctrine in any of its suggested formulations could apply to the facts of the present case. By leaving its stock of bullion in a non-differentiated state the company did not unjustly enrich itself by mixing its own bullion with that of the purchasers: for all the gold belonged to the company. It did not act wrongfully in acquiring, maintaining and using its own stock of bullion, since there was no term of the sale contracts or of the collateral promises, and none could possibly be implied, requiring that all bullion pur Thomson Reuters.

82 [1995] 1 A.C. 74 Page 21 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) chased by the company should be set aside to fulfil the unallocated sales. The conduct of the company was wrongful in the sense of being a breach of contract, but it did not involve any injurious dealing with the subject matter of the alleged trust. Nor, if some wider equitable principle is involved, does the case become any stronger. As previously remarked the claimants' argument really comes to this, that because the company broke its contract in a way which had to do with bullion the court should call into existence a proprietary interest in whatever bullion happened to be in the possession and ownership of the company at the time when the competition between the non-allocated claimants and the other secured and unsecured creditors first arose. The company's stock of bullion had no connection with the claimants' purchases, and to enable the claimants to reach out and not only abstract it from the assets available to the body of creditors as a whole, but also to afford a priority over a secured creditor, would give them an adventitious benefit devoid of the foundation in logic and justice which underlies this important new branch of the law.v. Conclusion on property in bullion For these reasons their Lordships reject, in company with all the judges in New Zealand, the grounds upon which it is said that the customers acquired a proprietary interest in bullion. In the light of the importance understandably attached to this dispute in the courts of New Zealand, and the careful and well-researched arguments addressed on this appeal, the Board has thought it right to approach the question afresh in some little detail. The question is not, however, novel since it has been discussed in two English authorities very close to the point.*100 by Oliver J., and in other circumstances their Lordships would have been content to do little more than summarise it and express their entire agreement. So also with the judgment delivered by Scott L.J. in Mac-Jordan Construction Ltd. v. Brookmount Erostin Ltd. [1992] B.C.L.C. 350 which is mentioned by Gault J. [1993] 1 N.Z.L.R. 257, 284, but not discussed since it was not then reported in full. This was a stronger case than the present, because the separate fund which the contract required the insolvent company to maintain would have been impressed with a trust in favour of the other party, if in fact it had been maintained and also because the floating charge which, as the Court of Appeal held, took priority over the contractual claim, expressly referred to the contract under which the claim arose. Once again, their Lordships are fortified in their conclusion by the fact that the reasoning of Scott L.J. conforms entirely with the opinion at which they have independently arrived.vi. Proprietary interests derived from the purchase price Their Lordships now turn to the proposition, which first emerged during argument in the Court of Appeal, and which was not raised in the London Wine case [1986] P.C.C. 121, that a proprietary interest either sprang into existence on the sales to customers, or should now be imposed retrospectively through restitutionary remedies, in relation not to bullion but to the moneys originally paid by the customers under the contracts of sale. Here at least it is possible to pin down the subject matter to which the proprietary rights are said to relate. Nevertheless, their Lordships are constrained to reject all the various ways in which the submission has been presented, once again for a single comparatively simple reason. The first is the judgment of Oliver J. in In Re London Wine Co. (Shippers) Ltd. [1986] P.C.C The facts of that case were not precisely the same as the present, and the arguments on the present appeal have been more far-reaching than were there deployed. Nevertheless their Lordships are greatly fortified in their opinion by the close analysis of the authorities and the principles The first argument posits that the purchase moneys were from the outset impressed with a trust in favour of the payers. That a sum of money paid by the purchaser under a contract for the sale of goods is capable in principle of being the subject of a trust in the hands of the vendor is clear. For this purpose it is necessary to show either a mutual intention that the moneys should 2011 Thomson Reuters.

83 [1995] 1 A.C. 74 Page 22 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) not fall within the general fund of the company's assets but should be applied for a special designated purpose, or that having originally been paid over without restriction the recipient has later constituted himself a trustee of the money: see Quistclose Investments Ltd. v. Rolls Razor Ltd. [1970] A.C. 567, This requirement was satisfied in In Re Kayford Ltd. (In Liquidation) [1975] 1 W.L.R. 279 where a company in financial difficulties paid into a separate deposit account money received from customers for goods not yet delivered, with the intention of making withdrawals from the account only as and when delivery was effected, and of refunding the payment to customers if an insolvency made delivery impossible. The facts of the present case are, however, inconsistent with any such trust. This is not a situation where the customer engaged the company as agent to purchase*101 bullion on his or her behalf, with immediate payment to put the agent in funds, delivery being postponed to suit the customer's convenience. The agreement was for a sale by the company to, and not the purchase by the company for, the customer. The latter paid the purchase price for one purpose alone, namely to perform his side of the bargain under which he would in due course be entitled to obtain delivery. True, another part of the consideration for the payment was the collateral promise to maintain separate cover, but this does not mean that the money was paid for the purpose of purchasing gold, either to create the separate stock or for any other reason. There was nothing in the express agreement to require, and nothing in their Lordships' view can be implied, which constrained in any way the company's freedom to spend the purchase money as it chose, or to establish the stock from any source and with any funds as it thought fit. This being so, their Lordships cannot concur in the decision of Cooke P. [1993] 1 N.Z.L.R. 257, , that the purchase price was impressed with a continuing beneficial interest in favour of the customer, which could form the starting point for a tracing of the purchase moneys into other assets. The same insuperable obstacle stands in the way of the alternative submission that the company was a fiduciary. If one asks the inevitable first question - What was the content of the fiduciary's duty? - the claimants are forced to assert that the duty was to expend the moneys in the purchase and maintenance of the reserved stock. Yet this is precisely the obligation which, as just stated, cannot be extracted from anything express or implied in the contract of sale and the collateral promises. In truth, the argument that the company was a fiduciary (as regards the money rather than the bullion) is no more than another label for the argument in favour of an express trust and must fail for the same reason. Thus far, all the arguments discussed have assumed that each contract of sale and collateral promises together created a valid and effective transaction coupling the ordinary mutual obligations of an agreement for the sale of goods with special obligations stemming from a trust or fiduciary relationship. These arguments posit that the obligations remain in force, albeit unperformed, the claimants' object being to enforce them. The next group of arguments starts with the contrary proposition that the transactions were rendered ineffectual by the presence of one or more of three vitiating factors: namely, misrepresentation, mistake and total failure of consideration. To these their Lordships now turn. It is important at the outset to distinguish between three different ways in which the existence of a misrepresentation, a mistake or a total failure of consideration might lead to the existence of a proprietary interest in the purchase money or its fruits superior to that of the bank. 1. The existence of one or more of these vitiating factors distinguished the relationship from that of an ordinary vendor and purchaser, so as to leave behind with the customer a beneficial interest in the purchase moneys which would otherwise have passed to the company when the money was paid. This interest remained with the customer throughout everything that followed, and can now be enforced against the general assets of the company, including the bullion, in priority to the interest of the bank.* Even if the full legal and beneficial interest in the purchase moneys passed when they were paid 2011 Thomson Reuters.

84 [1995] 1 A.C. 74 Page 23 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) over, the vitiating factors affected the contract in such a way as to revest the moneys in the purchaser, and, what is more, to do so in a way which attached to the moneys an interest superior to that of the bank. 3. In contrast to the routes just mentioned, where the judgment of the court would do no more than recognise the existence of proprietary rights already in existence, the court should by its judgment create a new proprietary interest, superior to that of the bank, to reflect the justice of the case. customers are entitled to get their money back. As a last resort the non-allocated claimants invited the Board to treat the contracts as rescinded if their claims for a proprietary interest in bullion were rejected. There is however no mechanism which would permit the claimants to pause, as it were, half way through the delivery of the present judgment and elect at last to rescind; and even if such a course were open, the remedies arising on rescission would come too late to affect the secured rights of the bank under its previously crystallised floating charge. With these different mechanisms in view, their Lordships turn to the vitiating factors relied upon. As to the misrepresentations these were presumably that (in fact) the company intended to carry out the collateral promise to establish a separate stock and also that (in law) if this promise was performed the customer would obtain a title to bullion. Whether the proprietary interests said to derive from this misrepresentation were retained by the customers from the moment when they paid over the purchase moneys, or whether they arose at a later date, was not made clear in argument. If the former, their Lordships can only say that they are unable to grasp the reasoning for if correct the argument would entail that even in respect of those contracts which the company ultimately fulfilled by delivery the moneys were pro tempore subject to a trust which would have prevented the company from lawfully treating them as its own. This cannot be right. As an alternative it may be contended that a trust arose upon the collapse of the company and the consequent nonfulfilment of the contracts. This contention must also be rejected, for two reasons. First, any such proprietary right must have as its starting point a personal claim by the purchaser to the return of the price. No such claim could exist for so long as the sale contract remained in existence and was being enforced by the customer. That is the position here. The customers have never rescinded the contracts of sale, but have throughout the proceedings asserted various forms of proprietary interest in the bullion, all of them derived in one way or another from the contracts of sale. This stance is wholly inconsistent with the notion that the contracts were and are so ineffectual that the Furthermore, even if this fatal objection could be overcome, the argument would, in their Lordships' opinion, be bound to fail. Whilst it is convenient to speak of the customers "getting their money back" this expression is misleading. Upon payment by the customers the purchase moneys became, and rescission or no rescission remained, the unencumbered property of the company. What the customers would recover on rescission would not be "their" money, but an equivalent sum.*103 Leaving aside for the moment the creation by the court of a new remedial proprietary right, to which totally different considerations would apply, the claimants would have to contend that in every case where a purchaser is misled into buying goods he is automatically entitled upon rescinding the contract to a proprietary right superior to those of all the vendor's other creditors, exercisable against the whole of the vendor's assets. It is not surprising that no authority could be cited for such an extreme proposition. The only possible exception is In Re Eastgate; Ex parte Ward [1905] 1 K.B Their Lordships doubt whether, correctly understood, the case so decides, but if it does they decline to follow it. Similar objections apply to the second variant, which was only lightly touched upon in argument: namely, that the purchase moneys were paid under a mistake. Assuming the mistake to be that the collateral promises would be performed and would yield a proprietary right, what effect would they have on the contracts? Obviously not to make them void ab initio, for otherwise it would mean that the customers had no right to in Thomson Reuters.

85 [1995] 1 A.C. 74 Page 24 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) sist on delivery. Perhaps the mistake would have entitled the customers to have the agreements set aside at common law or under statute, and upon this happening they would no doubt have been entitled to a personal restitutionary remedy in respect of the price. This does not, however, advance their case. The moneys were paid by the customers to the company because they believed that they were bound to pay them; and in this belief they were entirely right. The situation is entirely different from Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105, to which much attention was given in the Court of Appeal and in argument before the Board. It may be - their Lordships express no opinion upon it - that the Chase Manhattan case correctly decided that where one party mistakenly makes the same payment twice it retains a proprietary interest in the second payment which (if tracing is practicable) can be enforced against the payees' assets in a liquidation ahead of unsecured creditors. But in the present case, the customers intended to make payment, and they did so because they rightly conceived that that was what the contracts required. As in the case of the argument based on misrepresentation, this version conceals the true nature of the customers' complaint: not that they paid the money, but that the goods which they ordered and paid for have not been delivered. As in the case of the misrepresentation, the alleged mistake might well have been a ground for setting aside the contract if the claimants had ever sought to do so; and in such a case they would have had a personal right to recover the sum equivalent to the amount paid. But even if they had chosen to exercise this right, it would not by operation of law have carried with it a proprietary interest. claimed to recover the price for a total failure of consideration, and this at once puts*104 paid to any question of a residuary proprietary interest and distinguishes the case from those such as Sinclair v. Brougham [1914] A.C. 398, where the transactions under which the moneys were paid were from the start ineffectual; and Neste OY v. Lloyds Bank Plc. [1983] 2 Lloyd's Rep. 658, where to the knowledge of the payee no performance at all could take place under the contract for which the payment formed the consideration. There remains the question whether the court should create after the event a remedial restitutionary right superior to the security created by the charge. The nature and foundation of this remedy were not clearly explained in argument. This is understandable, given that the doctrine is still in an early stage and no single juristic account of it has yet been generally agreed. In the context of the present case there appear to be only two possibilities. The first is to strike directly at the heart of the problem and to conclude that there was such an imbalance between the positions of the parties that if orthodox methods fail a new equity should intervene to put the matter right, without recourse to further rationalisation. Their Lordships must firmly reject any such approach. The bank relied on the floating charge to protect its assets; the customers relied on the company to deliver the bullion and to put in place the separate stock. The fact that the claimants are private citizens whereas their opponent is a commercial bank could not justify the court in simply disapplying the bank's valid security. No case cited has gone anywhere near to this, and the Board would do no service to the nascent doctrine by stretching it past breaking point. Their Lordships are of the same opinion as regards the third variant, which is that a proprietary interest arose because the consideration for the purchase price has totally failed. It is, of course, obvious that in the end the consideration did fail, when delivery was demanded and not made. But until that time the claimants had the benefit of what they had bargained for, a contract for the sale of unascertained goods. Quite plainly a customer could not on the day after a sale have Accordingly, if the argument is to prevail some means must be found, not forcibly to subtract the moneys or their fruits from the assets to which the charge really attached, but retrospectively to create a situation in which the moneys never were part of those assets. In other words the claimants must be deemed to have a retained equitable title: see Goff and Jones, The Law of Restitution, 4th ed., p. 94. Whatever the mechanism for such deeming may be in other circumstances their 2011 Thomson Reuters.

86 [1995] 1 A.C. 74 Page 25 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) Lordships can see no scope for it here. So far as concerns an equitable interest deemed to have come into existence from the moment when the transaction was entered into, it is hard to see how this could coexist with a contract which, so far as anyone knew, might be performed by actual delivery of the goods. and if there was no initial interest, at what time before the attachment of the security, and by virtue of what event, could the court deem a proprietary right to have arisen? None that their Lordships are able to see. Although remedial restitutionary rights may prove in the future to be a valuable instrument of justice they cannot in their Lordships' opinion be brought to bear on the present case. For these reasons the Board must reject all the ways in which the non-allocated claimants assert a proprietary interest over the purchase price and its fruits. This makes it unnecessary to consider whether, if such an interest had existed, it would have been possible to trace from the subject matter of the interest into the company's present assets. Indeed it would be unprofitable to do so without a clear understanding of when and how the equitable interest arose, and of its nature. Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd. v. Canadian Imperial Bank of*105 Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W.L.R. 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In Re Diplock [1948] Ch The observations of the Board in the Space Investments case were concerned with a mixed, not a non-existent, fund.vii. The position of the bank The claimants have sought to contend that if they fail on everything else they are still entitled to an equitable right founded on wrongful dealing on the part of the bank. Thorp J. was prepared to go this far with the argument, that the bank knew at least by June 1988, and probably before, that the company's obligations to supply bullion far exceeded its ability to do so. But the judge could not see, any more than the Board can see, how this could prevent the bank from claiming the normal benefits of its security. Much more than this would be required, and nothing has so far been forthcoming. Quite apart from the practical impossiblity of founding any conclusion on the fragmentary written material now available, it would be quite impossible for the Board to conclude any inquiry on its own account without the benefit of an investigation by the courts in New Zealand, in the light of the full discovery and extensive oral evidence which would be essential to doing justice in the matter. Understandably, Thorp J. did not consider an application by the receivers for directions to be a suitable vehicle for such an inquiry. All that the Board can say is that if there is material in support of the more serious allegations, nothing in this opinion will prevent its deployment in a proper manner.viii. Non-allocated claimants: conclusions Their Lordships fully acknowledge the indignation of the claimants, caught up in the insolvency of the group of which the company formed part, on finding that the assurances of a secure protection on the strength of which they abstained from calling for delivery were unfulfilled; and they understand why the court should strive to alleviate the ensuing hardship. Nevertheless there must be some basis of principle for depriving the bank of its security and in company with McKay J. [1993] 1 N.Z.L.R. 257, , they must find that none has been shown.ix. The claim by the second respondent The claim by the second respondent differs in only three respects from those of the non-allocated claimants as a whole. First, it is very much larger. He agreed to purchase 1,000 gold maple coins at a price of $732,000. While this entirely explains his special indignation at the conduct of the company, and his consequent decision to pursue a separate claim, it plainly makes no difference to the outcome. The second ground of distinction concerns the circumstances of the purchase. In brief, what 2011 Thomson Reuters.

87 [1995] 1 A.C. 74 Page 26 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) happened was this. On 11 February 1988 the second respondent made a purchase for 52 maple coins. He handed over a cheque and was told that seven days would be needed to clear it before *106 he could collect the coins. In the meantime, he decided to make a larger purchase and with this in mind he hired a safe deposit box from another company to store the 52 maples and the further maples which he proposed to purchase. He then called again at the offices of the company and was given a description of the method of making unallocated purchases on the same general lines as those given to the other claimants. This caused him to change his mind about taking physical delivery of the coins already bought and those which he intended to add. Instead, he made an agreement for the purchase of a further 1,000 maples and did not call for delivery, relying on the collateral promises. He did not personally receive a certificate of deposit referring to the goods as unallocated, since he was abroad at the relevant time. These facts are more favourable to the second respondent's claim than those of the non-allocated claimants as a whole. The second respondent was at least shown 52 coins in respect of which the court was later to find that there was an ascertainment and appropriation sufficient to pass the property, and the fact that the two transactions were closely linked could certainly have given the second respondent the impression that their legal effect would be the same. Acknowledging this, their Lordships cannot find that the distinction makes any difference. Whatever the second respondent may have thought, and whatever the special features of the transaction, the fact remains that it was an agreement for the purchase of generic goods. For the reasons already given such contract even when accompanied by the collateral promises could not create a proprietary interest of any kind. The third ground of distinction from the case of the non-allocated claimants is as follows. The second respondent's purchase was so large by comparison with the company's ordinary retail bullion transactions that the company felt it prudent to reduce its "short" position in maples by buying in a substantial quantity of extra coins. It was argued on behalf of the second respondent that the coins so purchased were earmarked for the second respondent's purchases and hence through ascertainment and appropriation became his immediate property, only afterwards being wrongfully admixed with the bulk of the bullion in the vault. If this argument were correct, it would follow that not only was the company not entitled to deal with the coins in any other way than to deliver them to the second respondent when called, but also that it could not supply him with coins from any other source. No doubt if the facts were strong enough the court would be able to conclude that this was what the company had done with the implied consent of the second respondent. In the event, however, the evidence of the bullion manager and clerk, upon which the second respondent relied before Thorp J. to prove the appropriation, was (as the judge put it) "demonstrably against the proposition that the maples purchased by Exchange were purchased expressly for [the second respondent] and therefore appropriated to his contract." The judge went on to give reasons for this opinion, and nothing in the analysis of the facts presented to the Board gives their Lordships any reason to doubt that the judge's conclusion was correct. In these circumstances their Lordships are constrained to allow the appeal of the bank in respect of the second respondent for the same reasons as those already given in relation to the non-allocated claimants.*107 X. The Walker & Hall claims These claims are on a different footing. It appears that until about 1983 the bullion purchased by customers of the predecessor of Walker & Hall Commodities Ltd. was stored and recorded separately. Thereafter, the bullion representing purchases by customers was stored en masse, but it was still kept separate from the vendor's own stock. Furthermore, the quantity of each kind of bullion kept in this pooled mass was precisely equal to the amount of Walker & Hall's exposure to the relevant categories of bullion and of its open contracts with customers. The documenta Thomson Reuters.

88 [1995] 1 A.C. 74 Page 27 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) tion was also different from that received by the customers who later became the non-allocated claimants. The documents handed to the customer need not be quoted at length, but their general effect was that the vendor did not claim title in the bullion described in the document and that the title to that bullion, and the risk in respect of it, was with the customer. The document also stated that the vendor held the bullion as custodian for the customer in safe storage. These arrangements ceased when the shares of Walker & Hall were purchased by the company, and the contractual rights of the customers were transferred. The features just mentioned persuaded Thorp J. at first instance to hold, in contrast to his conclusion in relation to the non-allocated claimants and the second respondent, that there had been a sufficient ascertainment and appropriation of goods to the individual contracts to transfer title to each customer; and that thereafter the customers as a whole had a shared interest in the pooled bullion, which the vendors held on their behalf. The Dublin City Distillery case [1914] A.C. 823 was cited in support of this conclusion. It followed that when the company absorbed the hitherto separated bullion into its own trading stock upon the acquisition of Walker & Hall's business, and thereafter drew upon the mixed stock, it wrongfully dealt with goods which were not its own. Thus far, the decision of Thorp J. was favourable to the Walker & Hall claimants. There remained, however, the question of relief. Here, the judge applied conventional principles of tracing and concluded that the proprietary recoveries of the Walker & Hall claimants and those in a similar position could not exceed the lowest balance of metal held by the company between the accrual of their rights and the commencement of the receivership: see James Roscoe (Bolton) Ltd. v. Winder [1915] 1 Ch. 62 and the passages from Ford and Lee's Principles of the Law of Trusts, 2nd ed. (1990), pp , paras , and Goff and Jones, The Law of Restitution, 3rd ed. (1986), p. 74 cited by the judge. Although the Walker & Hall claimants had succeeded on liability the bank was not unduly concerned, since the limitation of the claim to the lowest intermediate balance meant that it was of comparatively small financial significance. The bank therefore did not appeal against this part of Thorp J.'s judgment when the unsuccessful claimants appealed to the Court of Appeal against other aspects of that judgment. A rather confusing situation then arose. Because the bank had not appealed in relation to the Walker & Hall claimants the Court of Appeal had no occasion to consider whether these claimants really were, as the judge had held, in a different position from the nonallocated claimants and the second respondent, although some brief observations by Gault J. in his*108 judgment [1993] 1 N.Z.L.R. 257, 277, appeared to indicate some doubt on this score. When, however, the court had turned to the question of quantum, and ordered that the nonallocated claimants and the second respondent were entitled to charges on the remaining bullion assets of the company in priority to the charge of the bank, it concluded its declaration with the words "and the successful claimants in the High Court are in the same position as the present appellants to the extent they cannot recover under the judgment of Thorp J." This enhancement of the remedy available to the Walker & Hall claimants made Thorp J.'s adverse judgment much more serious for the bank, and accordingly the bank desired to appeal to this Board not only on the ground that the Court of Appeal had wrongly enlarged the remedy but also (in case it should be held that in principle the decision of the court on the availability of a remedy should be upheld) on the ground that Thorp J. had been in error when holding that the Walker & Hall claimants had any proprietary rights at all. To this the Walker & Hall claimants objected, on the ground that since the bank had never appealed to the Court of Appeal on the issue of liability it could not appeal to the Board. The bank responded that it was not they but the claimants who had set the appellate procedure in motion and if the judgment of Thorp J. was to be reopened at all, it ought to be reconsidered in full. In the event, a lengthy investigation by the Board of what had happened in the Court of Appeal was avoided by a sensible arrangement between the 2011 Thomson Reuters.

89 [1995] 1 A.C. 74 Page 28 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) parties, whereby the bank accepted its willingness to abide by the decision of Thorp J. on liability (although without making any concession upon it) in the event that the Board restored the judge's decision on the measure of recovery. To this issue, therefore, their Lordships will immediately turn. particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank." On the facts found by the judge the company as bailee held bullion belonging to the individual Walker & Hall claimants, intermingled the bullion of all such claimants, mixed that bullion with bullion belonging to the company, withdrew bullion from the mixed fund and then purchased more bullion which was added to the mixed fund without the intention of replacing the bullion of the Walker & Hall claimants. In these circumstances the bullion belonging to the Walker & Hall claimants which became held by the company's receivers consisted of bullion equal to the lowest balance of metal held by the company at any time: see James Roscoe (Bolton) Ltd. v. Winder [1915] 1 Ch. 62. The Walker & Hall claimants now seek to go further and ask the court to impose an equitable lien on all the property of the company at the date of the receivership to recover the value of their bullion unlawfully misappropriated by the company. Such a lien was considered by the Board in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W.L.R In that case the Board held that beneficiaries could not claim trust moneys lawfully deposited by a bank trustee with itself as banker in priority to other depositors and unsecured creditors. But Lord Templeman considered the position which would arise if a bank trustee unlawfully borrowed trust moneys. He said, at p. 1074: "A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or*109 wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any These observations were criticised by Professor Goode in his Mary Oliver Memorial Address (1987) 103 L.Q.R. 433, , as being inconsistent with the observations of the Court of Appeal in In Re Diplock [1948] Ch. 465, 521, where it was said: "The equitable remedies presuppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief." In the case of a bank which employs all borrowed moneys as a mixed fund for the purpose of lending out money or making investments, any trust money unlawfully borrowed by a bank trustee may be said to be latent in the property acquired by the bank and the court may impose an equitable lien on that property for the recovery of the trust money. The imposition of such an equitable lien for the purpose of recovering trust money was more favourably regarded by Professor Peter Birks in An Introduction to the Law of Restitution (1989), pp. 377 et seq., and by Goff and Jones, The Law of Restitution, 4th ed., especially at pp Thomson Reuters.

90 [1995] 1 A.C. 74 Page 29 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 [1995] 1 A.C. 74 [1994] 3 W.L.R. 199 [1994] 2 All E.R. 806 [1994] 2 B.C.L.C. 578 [1994] C.L.C. 591 (1994) 13 Tr. L.R. 434 (1994) 91(24) L.S.G. 46 (1994) 144 N.L.J. 792 (1994) 138 S.J.L.B. 127 Times, June 2, 1994 (Cite as: [1995] 1 A.C. 74) The law relating to the creation and tracing of equitable proprietary interests is still in a state of development. In Attorney-General for Hong Kong v. Reid [1994] A.C. 324 the Board decided that money received by an agent as a bribe was held in trust for the principal who is entitled to trace and recover property representing the bribe. In Lord Napier and Ettrick v. Hunter [1993] A.C. 713, , the House of Lords held that payment of damages in respect of an insured loss created an equitable charge in favour of the subrogated insurers so long only as the damages were traceable as an identifiable fund. When the scope and ambit of these decisions and the observations of the Board in the Space Investments case fall to be considered, it will be necessary for the history and foundations in principle of the creation and tracing of equitable proprietary interests to be the subject of close examination and full argument and for attention*110 to be paid to the works of Paciocco (1989) 68 Can. Bar Rev. 315, Maddaugh and McCamus, The Law of Restitution (1990), Emily L. Sherwin's article "Constructive Trusts in Bankruptcy" (1989) U. Ill. L.Rev. 297, 335, and other commentators dealing with equitable interests in tracing and referring to concepts such as the position of "involuntary creditors" and tracing to "swollen assets." In the present case it is not necessary or appropriate to consider the scope and ambit of the observations in the Space Investments case [1986] 1 W.L.R or their application to trustees other than bank trustees because all members of this Board are agreed that it would be inequitable to impose a lien in favour of the Walker & Hall claimants. Those claimants received the same certificates and trusted the company in a manner no different from other bullion customers. There is no evidence that the debenture holders and the unsecured creditors at the date of the receivership benefited directly or indirectly from the breaches of trust committed by the company or that Walker & Hall bullion continued to exist as a fund latent in property vested in the receivers. In these circumstances the Walker & Hall claimants must be restored to the remedies granted to them by the trial judge. Their Lordships will accordingly humbly advise Her Majesty that the appeal ought to be allowed, the judgment of the Court of Appeal of New Zealand of 30 April 1992 set aside and the judgment of Thorp J. of 17 October 1990 restored. Their Lordships were informed that the parties had been able to agree the matter of costs in any event and therefore make no order in that regard.(s. S. ) 1. Sale of Goods Act 1908, s. 18: "Goods MUST be ascertained - where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained." 2. Companies Act 1955, s. 345: "(1) A receiver a manager of the property of a company appointed under the powers contained in an instrument may apply to the court for directions in relation to any particular matter arising in connection with the performance of his functions, and on any such application the court may give such directions, or make such order declaring the rights of persons before the court of otherwise as the court thinks just." END OF DOCUMENT 2011 Thomson Reuters.

91 Property law Sjef van Erp* I. Introduction In distinction to the law of obligations comparative lawyers seem to have avoided property law. 1 From the 19 th century onwards, after the codification movement on the continent of Europe following the French Revolution, civil and common property law were seen, more than the law of obligations, as being of a national (local) character. Property law became in both the civil law as well as the common law tradition a highly technical legal area. In order to fully understand property law precise knowledge of code and statutory provisions was (and still is) required together with a thorough knowledge of case law and legal literature. This area of the law is, therefore, generally seen as a set of national, fairly rigid and technical legal rules, either in statutory or case law format, of a mandatory character, limiting the parties freedom to shape their legal relations at least as far as these relations may have effect vis-à-vis third parties. As a result property law became a rather petrified legal area, rooted in a desire for legal certainty. This had a direct impact on the comparative study of property law. Property lawyers from both civil and common law, having accepted that they shared the same political and economic ideas with regard to the political-economic infrastructure and also having accepted that, in spite of these shared ideas, as a result of historical divergence their systems differed at a technical level, became rather introvert. They tended to analyse property law problems only from the perspective of their own tradition and sometimes declined to even look at other national systems within that same tradition. The focus was on the national or regional system 1 Courses on comparative private law frequently are focussing on the law of obligations, because here, in spite of conceptual differences, convergence and not, as is the case with property law: primarily divergence between legal systems can be found. This convergence oriented comparative approach fits well into the growing regional and global tendency to harmonise or even unify large areas of contract law to facilitate regional and global trade. Within the framework of the European Union the first directives in the area of private (civil) law dealt with tort and contract law, not with property law. Even the European time-share directive and time share is most certainly a property concept only deals with pre-contractual information duties. Cf. Directive 94/47/EC of the European Parliament and the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis, Official Journal L 280, 29/10/1994, p

92 and not so much on developments outside that system. Comparative analysis of property law, for that reason, did not attract much attention and the comparative studies that were done took a divergence perspective as their starting-point. In other words, if a comparative lawyer did look at property law it was frequently from a negative convergence aspect: The two major legal systems in the Western world (civil law and common law) were seen as having such fundamentally different historical roots that the resulting conceptual differences were so deep that these two worlds would never be able to meet. The study of comparative property law was therefore more a matter of Auslandsrechtskunde (the pure study of foreign law) than comparative let alone: critical-comparative - analysis. Remarkably enough, contract and tort law (in other words: liability questions) have always been perceived quite differently. Contract and tort law are seen as the dynamic areas of private law, which show fascinating and exciting developments. The law of obligations is characterised by fundamental debates at a legal, philosophical and moral level on leading principles and on resulting new paradigms. Exciting new questions are raised, such as whether contract law is dead. 2 The only comparable statement that raised the same emotions among property lawyers as were provoked by the death of contract debate was the socialist statement that la propriété c est le vol (property is theft). 3 After communism became the leading ideology in, e.g., Russia, China and the states of Central and Eastern Europe a growing interest arose in studies of property law that focussed on a comparison between the so-called socialist legal systems, where private ownership had been banned, and the legal systems of Western Europe and the United States. With the decline of communism this interest, however, vanished quickly. 4 Besides the Marxist challenge of existing Western property concepts a further challenge that provoked and still provokes - a fundamental debate on the nature of property law are land claims by the autochthonous population in countries such as Australia, Canada, South Africa and the United States. These land claims are based on the presence of native people, who used the land before Western property law was brought to these countries by Western settlers and who perceive relations between people and land very differently than can be found in civil and common property law. Such claims are now recognised at least to a 2 G. Gilmore, The death of contract (Columbus: Ohio State University Press, 1974). 3 P.J. Proudhon, Qu est-ce que la propriéte? Ou recherches sur le principe du droit et du gouvernement (Paris: Garnier fréres, librairies, ). Cf. the opposite view by F. Bastiat, Propriété et Loi, Journal des Economistes issue of 15 May 1848: l homme naît propriétaire (a person is born being owner). 4 For an analysis of modern Russian law see E.A. Sukhanov, The right of ownership in the contemporary civil law of Russia, 44 McGill Law Jouranl/Revue de Droit de McGill, p. 301 ff. (1999): 2

93 certain degree. This acceptance raises questions concerning both the nature and justification of the Western type of ownership as well as whether and, if so, how these land claims can be fitted into Western property law. 5 In essence, these are questions of comparative property law. Although comparative property law, except for the influence of communism on property law and the land claims of autochthonous peoples, did not attract as much attention from comparative lawyers as the law of obligations, still notable exceptions exist. First of all, the International Encyclopedia of Comparative Law should be mentioned. This multivolume encyclopedia deals in Volume 6 with structural variations in property law, trust, apartment ownership and recordation of interests in land. 6 Some 10 years ago in Maastricht an international comparative property law colloquium was held entitled: Property law on the threshold of the 21st century of which the proceedings were afterwards published. 7 Also the collections of papers presented at biennial conferences on comparative property law, organised by the Centre for Property Law at the University of Reading should be referred to. 8 More recently, comparative property has been at the heart of studies on mixed legal systems, as in the collection of essays published in Mixed legal systems in comparative perspective. 9 The essays concern, among other topics, acquisition of ownership, coownership, servitudes and real burdens, rights in security, assignation/cession and trusts. The number of comparative property law studies has recently been growing as a result of efforts to harmonise or unify certain aspects of property law in areas crucial for international business transactions. Increasing regional and global economic integration has led to a growing awareness that divergence of legal rules may lead to inefficiency and raise transactions costs. This is particularly true for the area of secured transactions. 10 In Europe the four economic freedoms (free movement of goods, persons, services and capital), laid down in the treaties establishing the European Community and the European 5 Cf. for Australia the well-known Mabo case (Mabo and others v. Queeensland (No. 2) (1992) 175 CLR 1 F.C. 92/014) and for South Africa the leading Richtersveld case (Richtersveld Community and others v. Alexxor Ltd. and another, SA 12933, LCC). 6 F.H. Lawson, R. David, International Encyclopedia of Comparative Law, Volume 6, Property and trust, (Tübingen, The Hague: Mohr, Nijhoff, present). For a recent comparative study see U. Mattei, Basic principles of property law: a comparative legal and economic introduction, (Westport, CT: Greenwood Press, 2000). 7 G.E. van Maanen, A.J. van der Walt (eds.), Property law on the threshold of the 21st century: proceedings of an International colloquium "Property law on the threshold of the 21st century", August 1995, Maastricht (Antwerpen, Apeldoorn: Maklu, 1996). 8 E. Cooke, Modern studies in property law: a collection of papers of "Property 2000", the 3rd biennial conference of the Centre for Property law, held in March at the Univ. of Reading (Oxford: Hart, 2001); E. Cooke, Modern studies in property law, volumes II and III (Oxford: Hart, 2003 and 2005). 9 R. Zimmermann, D.Visser, K. Reid, Mixed legal systems in comparative perspective: property and obligations in Scotland and South Africa (Oxford: Oxford University Press, 2004). 10 Cf. A. Veneziano, Le garanzie mobiliari non possessorie: profili di diritto comparato e di diritto del commercio internazionale (Milano: Giuffrè, 2000). 3

94 Union, have a growing influence on property law. This can be seen in the case law developed by the European Court of Justice. 11 The implementation of the economic freedoms demand increasing integration of the economies of the member states and such economic integration is not possible without legal integration. As a result there is a growing need in to understand the various property law systems in Europe, in order to prepare harmonisation or even unification of those areas of property law relevant for cross-border business transactions within the European Union and the European Economic Area. This has led to various comparative publications. Firstly, the studies by Kieninger on security rights in movable property and by Graziadei, Mattei and Smith on commercial trusts, published as the result of the Trento Common Core of European private law project. 12 Secondly, the study by Von Bar and Drobnig on the interaction of contract law and tort and property law in Europe. 13 In their study Von Bar and Drobnig discuss transfer of title in movables, contractual security rights in movables, contractual security rights in immovables (mortgages) and trust law. 14 Within the framework of the Study Group on a European Civil Code, which is aimed at drafting a codified set of principles of, among other legal areas, core aspects of European property law, more studies in this area can be expected. 15 Finally, reference should also be made to the contributions on property law in a collection of essays entitled Towards a European Civil Code. In these essays transfer of property, security rights in movables, real security regarding immovables and trust law are being discussed. 16 A further recent development that has led to a growing interest in comparative property law is the constitutionalisation of private law. Fundamental human rights may have a direct impact also on property law, as can be seen in the case law developed by the European 11 Cf. Trummer v. Mayer (case C-222/97), to be found at the web site of the ECJ at: 12 E.-M. Kieninger Security rights in movable property in European private law (Cambridge: Cambridge University Press, 2004); M. Graziadei, U. Mattei and L. Smith, Commercial trusts in European private law (Cambridge: Cambridge University Press, 2005). 13 C. von Bar, U. Drobnig, The interaction of contract law and tort and property law in Europe: a comparative study, (München: Sellier, 2004). 14 See also P. von Wilmowsky, Europäisches Kreditsicherungsrecht : Sachenrecht und Insolvenzrecht unter dem EG-Vertrag (Tübingen: Mohr, 1996); E.-M. Kieninger, Mobiliarsicherheiten im Europäischen Binnenmarkt: zum Einfluß der Warenverkehrsfreiheit auf das nationale und internationale Sachenrecht der Mitgliedstaaten (Baden-Baden: Nomos, 1996); J.W. Rutgers, International reservation of title clauses: a study of Dutch, French and German private international law in the light of European law (The Hague: T.M.C. Asser Press, 1999);. For an earlier study see J.G. Sauveplanne (ed.), Security over corporeal movables (Leyden: A.W. Sijthoff, 1974). 15 More information can be found on the web site of the Study Group: See also C. von Bar (ed.) Sachenrecht in Europa: systematische Einführungen und Gesetzestexte, Volumes 1-4 (Osnabrück: Universitätsverlag Rasch, ). With regard to European trust law see also: D.J. Hayton and S.C.J.J. Kortmann, Principles of European trust law (The Hague/Deventer: Kluwer Law International/W.E.J. Tjeenk Willink, 1999). 16 A. Hartkamp (et al., eds.), Towards a European Civil Code (Nijmegen: Ars Aequi Libri/Kluwer Law International, 2004). 4

95 Court of Human Rights concerning the protection of ownership as laid down in Article 1 of the first Protocol to the European Convention on Human Rights. 17 A striking example of the effect that the court s case law may have on national property law can be found in the recent Pye case. 18 This case shows that national rules on prescription of a claim to ownership, which may lead to acquisition of ownership at the expense of the original owner, can be qualified as a violation of the protection of the right of ownership of the original owner as secured by article 1, Protocol 1 of the European Convention on Human Rights. Such a loss should be adequately compensated. The full impact of this case is, as yet, unclear, but it is to be expected that the case will lead to several comparative property law studies. II. A view on the future of comparative property law What this brief survey of the present state of affairs with regard to comparative property law indicates is that, in comparison to the law of obligations, the number of studies, although growing, is relatively small. In my view, a major reason for this is the still prevailing static approach to property law and as a consequence to comparative property law. In this approach the existing divergence between civil and common property law is seen as an historical accident that led to the coming into existence of two leading property law traditions, coherent within themselves and difficult to reconcile. This approach to property law is the expression of a legal mentality that I would like to call: technocratic conservatism. It is a legal mentality that is aimed at preservation of what exists and to only accept changes when these are completely unavoidable. It is also this mentality that is typical of the way in which property law is often taught, i.e. as a coherent set of mandatory and technical rules from which almost logical answers can be deduced. With regard to the future of comparative property law I have asked myself the question, whether property law still is so static and whether the underlying mentality may not already be changing as a result of regional and global integration of markets. Market integration is becoming a strong undercurrent in national economies, causing changes in the legal framework, including property law. What will be the impact of this undercurrent of 17 Convention for the Protection of Human Rights and Fundamental Freedoms, Rome, 4 Novermber, 1950; Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, Paris, 20 March Cf., e.g., Holy Monasteries v. Greece (case 10/1993/405/ ); for an overview of relevant case law see B. Mensah, European human rights case summaries (London and Sydney: Cavendish Publishing, 2000). See also J.-P. Loof and H. Ploeger, The right to property: the influence of Article 1 Protocol no. 1 ECHR on several fields of domestic law (Maastricht: Shaker Publishing, 2000). 18 J.A. Pye (Oxford) Ltd. v. the United Kingdom (Application no /02), to be found on the web site of the European Court of Human Rights: 5

96 regional and global economic integration on the comparative study of property law? In the next paragraphs I will show that a mentality change is imminent, leading to a rapidly increasing role of comparative property law. It can, of course, be doubted if the static description of property law was at all ever fully correct. Systems of property law are far more open to change than might seem. One clear example are the changes in continental property law systems after the French Revolution and the ensuing abolishment of the feudal system of land holding. Furthermore, only recently Scotland abandoned the feudal system and now even in England, where property law still is based upon feudal property law notions, the law commission is considering how to abolish the remnants of feudalism. 19 These are all very fundamental changes. In addition, it should be pointed out that, although In civil law systems property law is generally laid down in statutory format, it has also been developed to a considerable degree by courts, just as much as in common law jurisdictions the law has been reformed by statutes. In other words: although civil property law is generally laid down in statutory format, yet considerable changes take place through case law, whereas in common property law, essentially case law, sometimes deep changes occur by the enactment of statutes. An example of the first development is the introduction of the ownership for security purposes in German and Dutch law; a good example of the second development is the English Law of Property Act 1925 with its introduction of a limited number of property rights with regard to land under common law. Firs of all, to show that 19 th and 20 th century property law was not as static as it might seem, I will discuss an example of the changes caused in civil property law by creative judicial legal thinking. This example comes from German and, inspired by these developments in Germany, Dutch property law, at least until the introduction of the new Netherlands Civil Code. 20 In these two legal systems courts accepted a transfer of ownership for security purposes, because the rules on pledge did not allow the creation of a nonpossessory security interest. These rules caused grave difficulties for especially small and medium sized businesses, which could hardly obtain credit, as the only real security they had to offer was usually their inventory. Pledging the inventory was only possible either by bringing it in the power of the creditor (frequently a bank) or leaving it into the hands of a third person. Except a few Italian banks that sometimes had cellars to store the wine from wine growers whom they had given credit, banks were not interested in having the goods 19 See the Abolition of Feudal Tenure etc. (Scotland) Act, 2000 asp 5 and the information on the web site of the Law Commission for England and Wales: 20 Article 3:84 (3) Neth. C.C. introduced a so-called fiducia ban. 6

97 under their control. Pledging also prevented business people to sell the inventory freely and create a cash flow, which would allow them to pay off the loan. The case law remedying the lack of non-possessory security interests in the civil codes of Germany and the Netherlands by allowing the transfer of ownership for security purposes changed the German and Dutch law on security interests in movables fundamentally. 21 A second example to make clear how flexible property law proved to be also in the common law the Law of Property Act 1925 provides a good historical example. This act attempted to streamline English land law, also in the light of the introduction of land registration. A land registry does not function efficiently, if the information that is made available is not at least to a certain degree standardised. The Law of Property Act standardised the number of common law estates (property rights) by limiting these to a fixed number, thus introducing a type of numerus clausus in English land law, a concept wellknown in civil property law systems. 22 To show how dynamic property law has become and hence also the comparative analysis of property law I will, first of all, give a brief outline from a more static viewpoint of the two major Western property law traditions: civil law and common law. I will focus on the leading principles, underlying policies, fundamental concepts and basic rules (in other words: basic thought patterns) of these two traditions. It will be seen that these basic thought patterns, partly rooted in a common history, when compared resemble one another closely. To show this at a more concrete level I will then examine two fundamental problem areas: (1) new objects of property rights and (2) new types of property rights. Because sometimes a new object of property law can only be adequately protected through property law by the creation of a new property right, the two problem areas have to be considered together. These more explorative paragraphs on new objects and new types of property rights will be followed by putting property law in a broader economical context and by examining the possible consequences for property law of economic and the ensuing legal integration. In this part the focus will be on movable and immovable real security. My approach will be the, what I would call, open critical-comparative approach. By open I mean that it is not the aim 21 See for the Netherlands Hoge Raad 25 January 1929, Nederlandse Jurisprudentie 1929, 616. Under the new Civil Code such a transfer of ownership for security purposes no longer is allowed, although it can be argued that under the pressure of European private law Dutch law had to re-accept this type of transfer. See Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, Official Journal L 168, 27/06/2002, p In English law the problems concerning the use of inventory and claims as non-possessory security were solved through the introduction of the so-called floating charge in the case In re Panama, New Zealand, and Australian Royal Mail Company, (1870) L.R. 5 Ch. Ap Section 1 Law of Property Act

98 and object of my research to reach results from a set limited policy perspective. I attempt to understand property law systems from the viewpoint of their historical development and their presently existing internal dynamics in the light of external influence on these systems coming from, e.g., such regional integration structures as the European Union. I do not intend to give an analysis from the policy perspective of harmonisation or unification. If the results of comparative analysis are that there is indeed a gap between various legal systems, particularly civil and common law, then my follow-up question will not be how to bridge this gap. On the other hand, a critical analysis of the technical differences might show that similarities do exist at the level of underlying policies, leading principles and basic rules, which would make convergence possible. My perspective, therefore, is not a priori the convergence paradigm. My approach is also not a priori the cultural diversity paradigm. A foreign lawyer, of course, has to be very careful when studying a legal system in which he has not been educated. This does not mean, however, that a foreign lawyer will never be able to grasp a foreign legal system more than superficially. A major example of the latter is the way in which German legal scholars, who fled to the United States in the 1930 s, were able to become American lawyers. It is from a critical-comparative perspective that in the final and concluding paragraph the question will be revisited whether property law is of a static nature and, as such, will be resistant to calls for change. A positive answer to that question would mean that comparative property law has a bright future. III. Civil and common property law: a traditional static comparative analysis Comparative property law still frequently focuses on a description of the basic characteristics of civil law and common law, not really followed by an open critical-comparative analysis. What I would like to show in this paragraph is how such a traditional descriptive approach can and should be the basis for a truly comparative study, focussing on the search for common leading principles, policy choices and concepts. I will start with a description of the basic features of civil property law, followed by the basic features of common property law. Based upon this description, an example of a traditional static comparative property analysis will be given. The example will be whether in the common law, as in the civil law, a numerus clausus of property rights can be found. This is a fundamentally civilian doctrine, of which the underlying policy aspects can also be traced in the common law. 1. Civil law 8

99 a. Personal vs. real rights The summa divisio of civil law is the distinction between personal and real rights or, as they are also called, relative and absolute rights. 23 A relative right is a right that a particular person has against one or more specific other persons. This right corresponds with an obligation on the side of the person who has a duty. The name of this area of the law is based on the duty side of the legal relationship and is therefore called the law of obligations. Sources of relative rights are, to put it very simply, contracts and torts. Generally speaking, the sources are limited. Only from contract and tort (including quasi-contract or quasi-tort, such as unjustified enrichment) can an obligation arise. Depending upon the source, the content of the obligation and the freedom to shape that content vary. With regard to obligations arising from contract the parties have an enormous freedom, the so-called freedom of contract. With regard to tort it is different. What constitutes a tort is laid down by the law and the resulting obligation is generally the duty to pay damages. An absolute right is a right against the world or, as it is also called, a right erga omnes. 24 This means that these rights are extremely strong. Interestingly enough, this area of the law is called property law, meaning the law of property rights. The term, therefore, focuses on the right, not, as in the case of contract and tort, on the duty. It might be good at this point to make a few remarks on the duty side of absolute rights. The duty rests on everyone, but will only be invoked and enforced if a person violates the absolute right of another. The holder of such a right then has an option. He can either claim that he should be restored in his right. If this is a right of ownership the claim is called the rei vindicatio. He can also claim that the violation of that right constitutes a tort, which entitles him to a personal damages claim. He can even claim both. The difference can be seen in insolvency situations. The claim based on an absolute right means that it also binds the trustee in bankruptcy. The damages claim, on the contrary, is only a personal claim against the bankrupt estate. Whether it will be paid depends upon the funds available after the secured and preferential creditors have been paid. 23 Cf. M. Wolff, Beständigkeit und Wandel im Sachenrecht, Neue Juristische Wochenschrift 1987, p ff.; W. Wiegand, Die Entwicklung des Sachenrechts im Verhältnis zum Schuldrecht, Archiv für die civilistische Praxis 1990, p. 112 ff. See also V. Sagaert, Les interférences entre le droit des biens et le droit des obligations. Analyse de l'évolution depuis le Code civil, in: P. Wery (ed.), Le droit des obligations contractuelles et le bicentenaire du Code civil (Bruges: Die Keure, 2004), p. 353 ff. 24 It could also be argued that a right erga omnes is the sum total of personal rights that, e.g., the owner has against everyone. Cf. W.N. Hohfeld, Fundamental legal conceptions as applied in judicial reasoning and other legal essays; edited by Walter Wheeler Cook. (New Haven: Yale University Press, 1923). See for an analysis of civil law from the perspective of legal relationships already C.F. von Savigny, System des heutigen Römischen Rechts (Berlin: Deit und Comp., 1849), Vol. 1, p. 8 ff., where the Rechtsverhältnis is described as a way to have an overall view on civil law ( Gesamtanschauung ) and to express the dynamic nature of civil law rights. 9

100 Even in the civil law, as scholastic as it might appear, the earlier mentioned summa divisio is not as absolute as it seems. Traditionally, a major example to show this is the lease or rent agreement. According to the civil law tradition, a lease is a contract from which obligations arise. The lessor has to provide the lessee with the use of the object rented, the lessee has to pay the agreed upon price. The civil law, however, gives the lessee special protection in a situation where the lessor also owns the object leased. When, in such a case, the lessor would sell and transfer the object rented, he would still be bound by the lease agreement, but would no longer be able to perform. Only the new owner can now provide the lessee with the use of the object rented, but he is not a party to the lease agreement and thus not bound by it. If the new owner used his right of ownership as the basis for a rei vindicatio to evict the lessee, the latter would, consequently, only have a personal claim for nonperformance of the contract vis-à-vis the lessor. Traditionally, civil law systems have protected the lessee against this change of ownership. The legal phrase has been for a long time that a sale does not break a lease. The result is that lease has become, what might be called, a qualitative type of relationship or, to put it differently, a legal status. The moment someone else than the original owner/lessor becomes the owner, the legal status of lessor passes to the new owner. The latter will not only be bound by the duties (obligations) arising from the lease contract, but will also gain the benefits, i.e. the right to the lease payments. That lease has become a status is only true from the perspective of the lessor, not the lessee. From the lessee s viewpoint his right to the object rented still is personal and hence not freely transferable or otherwise marketable. English law has gone further and also given the lessee a legal status, resulting in a right that the lessee can transfer. The consequence is that under English law (as well as under other common law systems), lease has developed into an estate, a right that is not strictly personal, but valid against the world. What I only want to make clear at this point is that the summa divisio of relative and absolute rights is a starting point for legal analysis. It is an important civil law distinction, but it is not a dogma without exceptions. A further example to show this are the so-called qualitative rights and duties, also known as Reallasten or Realobligationen. These are rights and duties attached to, e.g., the quality of being the owner of an object. The new Dutch Civil Code has introduced this concept as a special type of obligation (in the sense of legal relationship) that has effect against certain, but not necessarily all, third parties. 25 This effect can arise with respect to either the creditor s or the debtor s side of the obligation or 25 See articles 6:251 and 252 Neth. C.C. 10

101 sometimes both. An example of a qualitative right is a guarantee; an example of a qualitative duty is not to build a brick wall to fence off one s land. Qualitative duties have been very restricted by the Dutch legislator. Such duties can only be created with regard to immovable property and can only be negative, i.e. contain a duty not to do something. As such, qualitative duties closely resemble servitudes. 26 b. Numerus clausus of absolute rights Given the erga omnes effect of absolute rights, the civil law has set certain limits concerning the number, content and effect of these rights. This is the so-called numerus clausus doctrine, which is at the heart of civil property law. This doctrine has various aspects. First of all, the number and content of the various absolute rights is limited by mandatory law. Absolute rights generally are, e.g., ownership, mortgage (hypothec), pledge, servitude, usufruct, superficies 27, emphyteusis 28 and intellectual property rights, such as copyright. What is meant by ownership, mortgage etc. is defined in either statute law (generally a Civil Code, but also so-called special statutes) or in case law. This is, what is called in German scholarship, the Typenzwang and Typenfixierung of absolute rights. The numerus clausus doctrine does not bring with it that the parties do not have any freedom at all to destine the content of absolute rights and it also does not imply that the list is closed indefinitely. Let me first make a few remarks about freedom of contract in civil property law and then about the nature of the closed list. Although very important, the numerus clauses doctrine nevertheless seems to function more as a frame of reference than as a stern guardian of civil property law. According to a leading French case the articles in the French Civil Code on ownership do not have an absolute character. 29 The Cour de Cassation stated that ni ces articles (the articles on ownership), ni aucune autre loi, n excluent les diverses modifications et décompositions dont le droit ordinaire de propriété est susceptible. The court concluded that certain feudal rights, governed by the customary law of Normandy, had remained valid after the enactment of the French Civil Code. Also in German law the numerus clausus doctrine is not as absolute as it seems. Under German law the buyer under a retention of title clause is given a property right with regard to the object bought, although formal ownership only passes after full payment of the purchase price. In spite of all the dogmatic difficulties, which resulted from the acceptance 26 Cf. articles 5:70 ff. Neth. C.C. 27 The right to own a building on land to is owned by someone else. 28 This is a long lease of land. 29 Caquelard c. Lemoine, Req. 13 févr (D.P. 34, , S. 34,

102 of such a new property right, German courts felt that fulfilling the practical need towards acceptance was more important than dogmatic resistance. The right thus created (a so-called Anwartschaftsrecht or expectation right) is now a well established, although by some academic scholars still contested, part of German property law. How German courts have struggled with the acceptance of such a right in the light of the numerus clausus of absolute rights becomes clear when one reads the definition of this right as being a wesensgleiches Minus compared to ownership. An expectation right is essentially not different from the right of ownership, but it is not the same. 30 Such a right comes very close to the beneficial ownership given by English equity law to the buyer of land. 31 Even where the numerus clausus principle is adhered to strictly, still parties are given some freedom to shape their property relations vis-à-vis third parties. An example to show that to a certain extent freedom of contract does exist in civil property law are the right of emphyteusis (a long lease of land) as it can be found under Dutch law and the right of servitude. Under Dutch law it is general practice that the right of emphyteusis is given shape by including in the deed of establishment a set of general conditions, describing and limiting the use of the property which is to be burdened with the right of emphyteusis. 32 If the conditions do not violate the nature of the right, their content becomes part of the real right and hence binds third parties. This leaves the parties to the original deed of establishment a considerable contractual freedom to give real effect to these conditions. Another example are servitudes. The degree of freedom that exists with regard to the creation of a servitude differs from country to country. In the Netherlands the concept is fairly open as long as no positive duty, i.e. a duty to act, is created. 33 If such a positive duty is included in the deed creating the servitude, the clause only has inter partes effect and does not of itself bind third parties. In the latter case third parties can only be bound if the clause is included in the deed of transfer of ownership to such a third party. The seller then imposes the duties contractually upon the buyer. Such clauses are known under the name of chain or perpetual clauses. It can, generally, be said that property law systems are very hesitant concerning the acceptance of positive duties having erga omnes effect. Burdens to do something can only be accepted by a legal system, as is frequently argued, if they are 30 German Supreme Court 24 June 1958, BGHZ 28, Rose v. Watson [1864] X HLC 672, Clark s Reports 11 ER Cf. The Law Reform Commission of Ireland, (LRC ), Interests of vendor and purchaser in land during the period between contract and completion (Dublin, 1995), to be found at: 32 Articles 5:85 Neth. C.C. ff. 33 See also the recent developments in Scottish law, as laid down in the Title Conditions (Scotland) Act 2003, 2003 asp 9, especially section

103 voluntary. Since the French Revolution the freedom of the human being has become a basic human right, feudal burdens have been abolished, particularly because these could contain a positive duty. The parties freedom to shape a property right depends upon the nature of the property right as defined by the legal system. In the case of ownership the nature of the right limits the freedom of the parties to a large extent, but not completely. Sometimes parties to a transfer of ownership can limit the effect of such a transfer. Although a transfer of ownership generally implies that the whole right as it existed before the transfer will pass., parties to such a transfer are in some legal systems free to limit its effect by stating explicitly for which purpose the ownership is transferred. German law, e.g., accepts that the transfer of ownership may be limited in its effects by the promise of the new owner that he will only use his rights as an owner to secure a claim he has against the former owner. 34 This is the transfer of ownership for security purposes. The new owner is in such a case not as free to do as he pleases compared to when the transfer would have been without such a security purpose. Such a transfer has an effect which resembles that of the creation of a common law trust, as the new (legal) owner has to take into account the interests of the former (now economic) owner. What is created is a civil law trust, such as the Treuhand under German law and the fiducie under future French law. Here one can see a basic thought pattern of the civil law shimmering through the technical rules: as a matter of principle the former owner only has a personal contractual right and not a real property right against the new owner that the new owner will use his right of ownership for a limited purpose. It depends upon the particular legal system, whether the former owner is given more than just such a personal claim based upon non-performance of the contract. The former owner will not soon be given an outright property entitlement against a third party, in case the new owner violates the contract limiting his powers. This would otherwise imply a fragmentation of ownership, which, according to the civil law tradition, is unitary. Ownership is not seen as a bundle of rights, which can be divided over several persons. 35 Accepting fragmented ownership would, furthermore, pave the way for breaking through the numerus clausus of absolute rights. By giving ownership 34 This might also in the future be allowed in French law. See the Proposition de loi instituant la fiducie, N 178, Sénat, Session ordinaire de , Annexe au procès-verbal de la séance du 8 février 2005, présentée par M. Philippe Marini, Sénateur. 35 See for the bundle of rights theory W.N. Hohfeld, Fundamental legal conceptions as applied in judicial reasoning and other legal essays; edited by Walter Wheeler Cook. (New Haven: Yale University Press, 1923). 13

104 powers to several people new real rights could be created and this is exactly what the numerus clausus doctrine wants to avoid. 36 A final aspect of the numerus clausus doctrine that I can only touch upon is the way in which a civil law system looks upon other real rights than ownership. These so-called limited real rights limit ownership and take away rights from the owner. In the civil law two approaches can be found. A civil law system may look upon a limited real right as a démembrement of ownership. Certain ownership rights are given to the person with the limited real right, such as a mortgagee. The very moment the limited real right vanishes, the owner regains his full rights. This is the elasticity approach to ownership. A limited real right restricts the right of ownership from the inside. Ownership and limited real rights cumulate internally. If, however, a civil law system considers a limited real right as having a, compared to ownership, limited content, but not carving away any rights from the owner, then ownership and a limited real right are seen as strictly separate rights. In this approach the owner accepts that certain of his ownership rights can no longer be used, in as far as and for the time that a limited real right has been created. The right of ownership and limited real rights then cumulate externally. This difference in view may have consequences in situations where one person obtains various property rights. In the external-cumulative approach, it is, e.g., easier to accept that one can be mortgagor and mortgagee at the same time, as is possible in the case of the German Eigentümergrundschuld. In the internal-cumulative approach the first reaction will be that at the very moment a limited real right passes upon the owner, the owner regains all his rights and that the limited real right will vanish. 37 In that approach an Eigenümergrundschuld is a contradictio in terminis. c. Is the civil law as dogmatic as it seems? It may seem from the above that the civil law is, on the one hand, scholastic and dogmatic in its structure, but, on the other hand, also shows flexibility and openness. The civil law has undergone the influence of the dogmatic analysis and reinterpretation of Roman law by European writers who examined Roman legal texts from the perspective of their own days. Taking Roman law as their starting point, they attempted to create an overall theoretical legal framework from which the existing reality could be explained in a coherent and systematic 36 Co-ownership is wholly different matter. In such a situation the co-owners share full ownership rights. However, the object of their right of ownership is an object that belongs to both of them. 37 Cf. W. Wiegand, Numerus clausus der dinglichen Rechte. Zur entstehung und Bedeutung eines zentralen zivilrechtlichen Dogmas, in: G. Köbler (ed.), Wege europäischer Rechtsgeschichte: Karl Kroeschell zum 60. Geburtstag dargelegt von Freunden, Schülern und Kollegen (Frankfurt am Main/New York: Lang, 1987), p. 623 ff. 14

105 way. Hence expressions such as that the system of the present Roman law was to be explained. 38 The influence of this dogmatic school of thought differs from country to country and it also depends upon the legal area. It will also be apparent from the above that this scholastic and dogmatic structure of the civil law does not imply by necessity that civil lawyers are rigid in their legal thinking and do not include in their analysis social reality and the need to further develop existing concepts or develop new categories. Reference can be made to the writings by W. Snijders, one of the leading Dutch civil lawyers responsible for the drafting of the new Dutch Civil Code in its final stages. In his writings Snijders reacts to criticism coming from both Dutch legal practitioners as well as academics. They argue that the new Civil Code is too strict, pointing out that the property law provisions in the new Civil Code are the expression of legal thinking predating regional and global economic integration. Snijders, in response, has been advocating the view that the text of the Civil Code should be approached in a flexible and not overly legalistic way and that the code is a source of reference and analogy. In his view the starting point of legal analysis should be that a civil code is not aimed at stopping further legal developments but attempts to channel these in a rational, constructive and consistent way. He advocates these ideas particularly when he presents his views on solutions of certain property law problems, such as the acceptance of new objects of property law. 39 In this approach a civil code is an interpretative framework, also open to solutions from other legal systems, that is not meant to limit, but to encompass future developments. 2. Common law a. Feudal remnants: the concepts of tenure and estate From several respects the common law still is rooted in the feudal system as it developed in England after the conquest by William the Conqueror in Mostly, the feudal system lives on through the use of feudal terminology. In other words: the feudal system survived from the perspective of form, which is reflected in land law terminology that is still used. Examples are the use of terms such as tenure and estate. The term tenure expresses that a person holds (French: tenire ) rights from the Crown or from a lord. The King or Queen is in the feudal system the Lord Paramount. This can still be seen in section 79(1) of the (English) Land Registration Act 2002, which reads: Her 38 F.C. von Savigny, System des heutigen Römischen Rechts (Berlin: Deit und Comp., 1849), Vol See, e.g., W. Snijders, Ongeregeldheden in het vermogensrecht, Part I, WPNR 6607, p. 79 ff. and Part II, WPNR 6608, p. 94 ff. (2005). 15

106 Majesty may grant an estate in fee simple absolute in possession out of demesne land to Herself. 40 What demesne land is can be found in section 132(1). It means land belonging to Her Majesty in right of the Crown which is not held for an estate in fee simple absolute in possession. In other words: the Crown is the sole person holding rights with regard to that particular piece of (demesne) land. Most land, however, is not held solely by the Crown. In fact, with regard to most land the Crown only has a nominal right and the idea of the Queen as the Lord Paramount is more an historical notion than legal reality. The rights of other persons holding land are called estates. The concept of estate denotes the time length of a particular entitlement with regard to land. A right can be, as in the case of a freehold estate, of unlimited duration. In the case of a leasehold estate, the entitlement is limited in time. 41 The leasehold estate was not immediately developed under the feudal system, but was later fitted into the existing feudal land categories. Nowadays, the feudal system as it existed in the centuries after the days of William the Conqueror of course no longer exists. It developed and has been reinterpreted in such a way that, drawing an analogy with the application of Roman law concepts on the continent, it might be said that today the system of the present feudal law is applied. Modern land law has been disconnected nearly completely from the original feudal system, although in certain respects the feudal system does live on. It can, therefore, be no surprise that the English Law Commission has started a project aimed at reforming land law to modernise it and do away with long gone feudal notions. 42 Scotland has even gone further and abolished the feudal system altogether from 28 November of To understand the changes in Scottish law it should be realised that the Scottish legal system, unlike English law, to a considerable degree was influenced by Roman law. It is therefore a mixed legal system in which two legal traditions (civil and common law) come together. When, under the influence of Roman legal thinking, the feudal rights had to be classified, a distinction was made and this happened also on the continent of Europe between the property right of the lord (superior) who conferred feudal rights upon someone and the property right of the person to whom the rights were conferred (vassal). The latter person de facto used the land, but had to accept the superior rights of the lord. This is why the first mentioned person was said to have the dominium utile and the second person the dominium directum. In this way a doctrine of duplex dominium was created. The purpose of 40 Land Registration Act 2002, 2002 Chapter F.H. Lawson and B. Rudden, The Law of Property (Oxford: Oxford University Press, 2002), p. 79 ff. 42 See the information on the web site of the Law Commission for England and Wales: 16

107 this doctrine was in a rather contradictory way it seems from a present day perspective to both maintain a unitary concept of ownership (dominium) as it was thought to have been applied by Roman lawyers as well as at the same time adapting this concept to the existing legal reality. The Abolition of Feudal Tenure etc. (Scotland) Act, after in Section 1 abolishing the feudal system, provides in Section 2(1) that an estate of dominium utile of land shall ( ) cease to exist as a feudal estate but shall forthwith become the ownership of the land. 43 This is not unlike what can be found in the Dècret relatif à l abolition des privileges of 4 August 1789, article 1, first sentence: L'Assemblée nationale détruit entièrement le régime feudal. (the National Assembly completely abolishes the feudal regime). In the light of the abolishment of the feudal system on the continent of Europe as a result of the French Revolution and in Scotland only a short time ago it is rather remarkable to see that feudalism still is alive and well on the Channel Islands. The property law of Jersey and Guernsey is not only rooted in the ancient customs of the Duchy of Normandy the same customs that were accepted as existing law in the above-mentioned Caquelard case but these customs are even applied until this very day. 44 It means that the existence of feudalism as such does not prevent the law from developing into a modern legal system. Particularly, if one considers that the Channel Islands are well-known centres of financial services. b. Personal vs. real rights The distinction between personal (e.g. contractual) and real (property rights) is also known in the common law. It should, however, not be forgotten that the concept of absolute right in the civilian sense of that term does not exist in the common law. What matters is the effect of a right vis-à-vis a third party. Such effect can be against the world and then its effect resembles an absolute right in the civilian sense. The effect could, however, also be more limited in the sense that it is only effective against one or more specific (groups of) third parties. This is what is meant by the relative strength of title with regard to movables. What matters in that case is, who in legal proceedings has the better right. c. Common law and equity 43 Abolition of Feudal Tenure etc. (Scotland) Act 2000 asp 5, to be found at: 44 See H. Basnage, Oeuvres de maître Henri Basnage: ecuyer, seigneur du Franquesnei, avocat au Parlement, contenant ses commentaires sur la coutume de Normandie, et son traité des hypothéques (Rouen: Louis Oursel, 1778) and see the Privy Council Decision in Snell v. Beadle (ne Silcock) 2001 JLR

108 A specific aspect of the common law, not directly related to the feudal system, is the existence of a duplex ordo: common law and equity. 45 That there is no direct relation between the existence of a feudal system and this duplex ordo can be seen when studying the feudal system, as it existed on the continent of Europe before it was abolished following the French Revolution. In the continental feudal systems the English distinction between old common law and new equity is absent. A consequence of the parallel existence of these two subsystems is that a person can have a property entitlement according to one of the two subsystems, but not according to the other. A prime example is the trust. The trustee (manager of a fund) has a property entitlement at common law, but does not also have to be entitled in equity. The beneficiary, on the contrary, has a property entitlement in equity, but does not also have to be entitled at common law. The position of the common law owner (the trustee) is stronger than the position of the equitable owner (the trust beneficiary). The survival of thought patterns emanating from the feudal system and the existence of a duplex ordo of common law and equity have led to a, what might be called, relational approach to property law. A civil lawyer is inclined to expect a clear-cut answer to the question whether one is an owner or not. The answer is either yes or no, given the unitary and non-fragmented concept of ownership. For a common lawyer it is not that simple. A common lawyer will want to know whether you ask the question according to common law or equity. Furthermore, with regard to land law, a common lawyer will use the concepts of tenure and estate and not the civil law concept of absolute rights. 3. Common elements: transparency requirements, transfer systems Because of the erga omnes effect of property rights, third parties must be aware of such rights. In order to provide a sufficient degree of transparency it must, first of all, be clear with regard to which object a property right is claimed and, secondly, the right must be visible to third parties. The latter can happen either through the exercise of factual power (possession) or through registration. These two aspects of the transparency principle are generally known as the principle of specificity and the principle of publicity. The transparency principle can be found in both civil and common law. Also in both civil and common law the same types of transfer systems can be found. These are systems to regulate the creation, transfer and termination of real rights. Two 45 I cannot discuss here the ongoing debate concerning the so-called fusion of common law and equity. It does, however, seem correct to say that common law and equity can be seen as subsystems (constitutive elements) of an overarching legal system. 18

109 distinctions can be made, firstly with regard to the property effect of a contract and secondly, the property effect of rescission or annulment of the agreement that has led to a transfer. Concerning the property effect of a contract the consensual system and the traditio system are distinguished. I will take the property effects of a sales contract as an example. Under the consensual system a contract of sale results in an immediate transfer of ownership, either merely between seller and buyer or also against (certain or all) third parties. This system is followed in, among other jurisdictions, France. Under a traditio system a contract of sale does not have any property effect. A further act of delivery is necessary for the transfer of ownership, although in some legal systems a contract of sale concerning an immovable can be provisionally registered at the land registry for the protection of the buyer against, e.g., the insolvency of the seller. The traditio system and its strict separation between contract and property can be found, among other jurisdictions, in Germany. The second distinction concerns the property effect of a defect concerning the underlying agreement. Again two systems can be distinguished, the causal and the abstract system. Under the causal system a defect in the underlying agreement means that there is no longer a justification for the transfer and that, for this reason, the transfer is invalid. The causal system can be found in France. Under an abstract system, the transfer of ownership is seen as a separate and independent legal act, inherently protecting third parties, unlike its opposite: the causal system. When under the abstract system a third party acquires the right of ownership or any other property right from the new owner whose purchase contract with the former owner has been dissolved or annulled, the third party will still get full and secure ownership. This means that any original owner is unprotected, unless some exceptions apply. Of course, the original owner will be protected through the law of unjustified enrichment or, if the requirements for such a claim have been fulfilled, a claim in tort against the third party. In insolvency situations this will not really help him, as these are only personal claims. Property law systems based upon the principle of abstraction, in order to counterbalance the overprotection of third parties, therefore may develop doctrines to annul also the transfer. This is done in German law through the doctrine of the Fehleridentät: a vital failure that invalidates the underlying agreement also invalidates the so-called real agreement, i.e. the agreement to transfer and, consequently, the transfer itself. Causal systems, on the other hand, tend to overprotect the original owner and therefore need special provisions to protect third parties in good faith Cf. L.P.W. van Vliet, Transfer of movables in German, French, English and Dutch law (Nijmegen: Ars Aequi Libri, 2000). 19

110 4. An example of a static comparison: the numerus clausus debate in American legal literature In a series of articles American authors have recently started a discussion on whether the common law knows a numerus clausus of absolute rights. 47 Their arguments are mostly based upon notions of efficiency and not so much on legal-dogmatic analysis. In defence of a numerus clausus theory thesy essentially put forward legal policy arguments, such as the need for legal certainty and that it should not be too costly for third parties to obtain information concerning property rights. Too much freedom for the parties would lead in the view of these authors to increasing fragmentation of property rights, which in its turn leads to legal uncertainty and increasing information costs for third parties whom, because of this uncertainty, need to get more and more information on the various property rights. From the viewpoint as advocated by these American authors it can be argued that the English Law of Property Act 1925 created a numerus clauses of common law estates to enable the introduction of an efficient and cost effective land registry and that the same development can be seen in some other common law jurisdictions where courts are reluctant to accept new property rights. 48 The approach taken in American legal literature does add an interesting and relevant policy aspect to the more dogmatic civilian debate on the numerus clausus. What is, however, to be regretted is that in this approach the focus is almost totally on legal policy aspects. The authors seem to be unaware of the enormous body of civilian literature on the numerus clausus. They do not hold their findings against the light of civilian legal dogmatic reasoning, which would have made the debate more dynamic and would have enriched it for both common and civil lawyers. IV. Civil and common property law: a dynamic analysis To show how a dynamic approach to property law in the light of an open-critical comparative analysis can open up our minds and help find creative and workable solutions, I will discuss in this paragraph two questions which are just as pressing in civil property law as they are in 47 Th. W. Merrill and H.E. Smith, Optimal standardization in the law of property: the numerus clausus principle, 110 Yale LJ 1 (2000); H. Hansmann and R. Kraakman, Property, contract, and verification: The numerus clausus problem and the divisibility of rights, 31 J. Legal Stud. 373 (2002); H.E. Smith, Property and property rules, 79 NYU L Rev 1719 (2004). 48 See for the mixed jurisdiction of South Africa M.J. de Waal, Numerus clausus and the development of new real rights in South African law, discussing the subtraction from the dominium test : vol. 3.3 Electronic Journal of Comparative Law, (December 1999), 20

111 common property law. Both questions raise fundamental property law issues. First of all, the question whether, and if so, which new objects of property law should be recognised in modern property law and, secondly, whether new types of property rights should be recognised. Before asking these questions and attempting an answer, some more general remarks should be made. In essence the law of property concerns legal relationships between people with regard to objects, from which rights ensue that a person may invoke against more than just particular other persons. We have already seen that the various rights that may be invoked against the world are generally limited. That can also be said about what qualifies as an object of property law. Whatever represents value, it has been argued, as a matter of principle can be an object of property law. By putting an object on the market it can be measured what this value is. This implies that the question as to what constitutes an object of property law is closely connected with the transferability or marketability of those objects. However, that does not always have to be the case. Something might be an object of property law, in spite of not being at least freely alienable. Examples are property extra commercium and so-called public property. Based upon the respect for the dignity of the human person, the human body is not property, unless a specific exception applies. Legal systems try to prevent a commercial trade in organs. This is a very difficult, not only legal, but also moral area. To whom belong body parts, e.g. organs? In a large number of systems special statutory regimes apply here. Public property are objects of property law (such as national parks and government buildings), which are under the control of the state and which may also not be freely alienable. The rules of prescription may also not apply here. Public property still represents value however, what can be seen the moment such property is privatised. Another example comes from space law. Article II of the Treaty on principles governing the activities of states in the exploration and use of outer space, including the moon and other celestial bodies, states that outer space, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means. 49 Concerning what can constitute an object of property law new questions keep coming up. Charles Reich asked himself the question whether new property (entitlements created by the government) could be recognised, a question also asked outside the United States. 50 New questions keep coming up. Who can own, and hence sell and transfer or pledge, a domain 49 Treaty on principles governing the activities of states in the exploration and use of outer space, including the moon and other celestial bodies, Signed at Washington, London, Moscow, January 27, Charles A. Reich, The New Property, 73 Yale L.J. 733 (1964). 21

112 name? Courts, faced with the question whether a domain name should be recognised as a new exclusive right, not yet recognised as an intellectual property right, have to balance various interests. First of all, the need to protect the value, which a domain name represents for the person holding the right to use that name. Secondly, the quasi-monopoly in the hands of the holder of that right which comes into existence once the right has been given protection as an exclusive right and the resulting disadvantages that may arise for others. The development of digital technology also provides another example of a possible new object of property law. Can one consider the right to use a wireless network as an asset that could be qualified as an object of property law? When I have the right to use a wireless telephone or data network, is my right of such a nature that I can sell and transfer it to someone else? Is not this what an individual mobile phone user does when he sells and transfers his mobile phone with prepaid sim card? Telephone companies that set up a mobile phone network and take care of maintenance may sell the right to use that mobile phone network ( capacity ) to other phone companies. Does the right to use the network thus become an object of property law? A different area of new objects of property law consists of rights created by public authorities, such as licenses. To implement the Kyoto Treaty, the European Union has created a system of trade in emission rights, following developments in the United States allowing such trading. 51 An emission right is defined as an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable in accordance with the provisions of this Directive. 52 A public law licence ( allowance ) is transformed into an object of private property law. Of course, opinion as to if a new object of property law has to be accepted can and will differ. A good example is the question whether the right to withdraw money under a given credit line can be seized by creditors. The German Supreme Court has given a strong affirmative reply; the Netherlands Supreme Court has given just such a strong negative reply. 53 Various aspects were considered. What is the nature of a client s right to withdraw money? Is it really a full-fledged right, or merely the power to create such a right (what in German law is called a Gestaltungsrecht)? If it is merely the latter, than it has not reached the 51 Kyoto protocol to the United Nations Framework Convention on Climate Change, signed in Kyoto on 11 December The treaty is a protocol to the United Nations Framework Convention on Climate Change (1992). As to European Union law see Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, OJ 2003, L 275/ Article 3(a) of Directive 2003/87/EC. 53 Bundesgerichtshof 29 March 2001, BGHZ, 147, 193; Hoge Raad, 29 oktober 2004, Rechtspraak van de Week 2004, nr

113 level of maturity needed to consider it a right that someone might own and consequently it may not be seized by a creditor. Once a new object of property law has been accepted the question arises how this new object can be fitted into the system of property law. Certain concepts and rules may be applied irrespective of the classification of the various objects (such as immovable, movable, a claim, intellectual property). With regard to the establishment, transfer or termination of a property right, however, property law systems use requirements that differ according to the nature of the object. Delivery of an immovable generally is done by registration of a formal document of transfer, whereas delivery of a movable is performed by transfer of possession. The nature of the new object of property will play a predominant role here. Licenses, such as emission rights, originate in public law and have a very special content. This will influence the answer to the question which property concepts and rules should be considered applicable. It might even be that, if the new object cannot be readily fitted into the existing system of property law, new concepts and rules have to be developed. This could go as far the creation of a new property right. Ownership of emission rights, does not necessarily have to mean the same as ownership of a movable physical asset. This might result in the adoption of a new property right (an absolute right in the civil law sense) concerning the entitlement to an emission right. It might further be questioned, if pledging or mortgaging of emission rights should be made possible, given the time limitation of such rights. Whether perhaps a new property right has to be created, is not a question that only arises with regard to new, but also with regard to old and well-recognised objects of property law. The question is sometimes raised whether a special property right should be created giving ownership of a cable network or a pipeline to the person operating the cable network or pipeline. Generally, the law of servitudes gives enough possibilities to companies building and using cable networks or pipelines to make them owner of the network, irrespective of the fact through or over which person s land the network or pipeline passes. However, it may be extremely burdensome and expensive to agree on the creation of a servitude with everyone of the involved landowners. One way to solve the problems can be a reformulation of the law of servitudes, as can be found in the American Restatement on Property 3 rd (Servitudes). 54 The restatement follows a pragmatic and non-formalistic approach. It leaves the parties involved all the freedom they need to pursue individual interests, albeit within a mandatory framework aimed at protecting the general interest. The leading maxim seems to be: no more mandatory 54 American Law Institute, Restatement of the law Third, Property, Servitudes, vol. 1 and 2 (St. Paul, MN: American Law Institute publishers, 2000). 23

114 rules than needed. However, the only feasible and practical solution might also very well be to create a new property right for the benefit of those who exploit a network or pipeline vis-à-vis land owners and others who have a limited real right with regard to land, entitling its holder to own a complete network or pipeline irrespective of its location. 55 These questions have become very acute in jurisdictions where these networks used to be in the hands of the government, but after privatisation are sold and transferred to private enterprises. In such circumstances it becomes a pressing matter to know exactly what is sold and transferred, not just with respect to the physical aspects of the network, but also with respect to the property rights involved. V. The osmosis of national, regional and global property law Integration of markets is having a growing impact on property law. Reference was already made to the influence of European law on the property law systems of the member states of the European Union. I mentioned the EU directive on emissions trading, which was enacted to implement the Kyoto Protocol. Whether a member state is willing to accept emission rights as a new object of property law or not, has become irrelevant. European law obliges the member-states to accept this. How these new rights then are to be fitted into the various national legal orders is another matter. To some degree the directive gives guidance, but for the rest it depends upon the various national legislators. The result is a paradox. The EU emissions directive creates regionally legal unity. At the same time the result is fragmentation and inconsistency. The member states are free to fill the lacunae in the directive by national law. Consequently, divergence between the various national legal systems might increase instead of decrease. Furthermore, fragmentation is increasing at the national level because next to property law emanating from the national legislature, European property law has to be applied. The same phenomenon can be seen at a global level. The Unidroit Cape Town Convention on international interests in mobile equipment introduces a uniform security interest for, among other objects, aircraft and railway rolling stock. 56 This interest has to be registered in a worldwide accessible computer registration system. Particularly for railway rolling stock this will be an innovation in many countries. Should national legal systems now 55 For the Netherlands see A.A. van Velten, Het zakenrechtelijk statuut van nutsleidingen in het Nederlandse recht, Tijdschrift voor Privaatrecht 2004, p ff.. 56 Unidroit Cape Town Convention on international interests in mobile equipment (Cape Town, 2001). 24

115 treat a rail carriage as if this was registered immovable property? What are the consequences for other movable objects of great value, such as trucks? Should not trucks in the future then also be treated as registered objects, which can be mortgaged through the entry of a mortgage deed in a computerised system? These matters are not resolved by the convention and must therefore be settled at a national level, with the risk of diverging national responses. A comparative analysis of the impact of the uniform regime might give an insight as to what problems are caused by it, how the various legal systems have reacted and in which way these problems can be solved uniformly and avoided in the future. The preparation of a uniform regime and the analysis of the impact of such a regime on national law can only be done adequately on a comparative basis. In this way models can be discovered, compared and evaluated, looking at their various advantages and disadvantages, examining their suitability to act as a uniform model. A leading model in the area of personal property security interests is, because of its pragmatic, flexible and open approach, Article 9 of the American Uniform Commercial Code (UCC). The Cape Town convention is clearly to a large degree inspired by Article 9 UCC. That is also the case with the model law on secured transactions drafted by the European Bank for Reconstruction and Development (EBRD), offering a model to countries with economies in transition after the collapse of communism. 57 The EBRD model is also inspired by the English floating charge: a charge on the whole of a company s assets, both present and future. Particularly the latter aspect of the model may create problems in civil law systems that adhere strictly to the principle of specificity. A floating charge is a, what was called before the French Revolution, general mortgage and it is this type of mortgage that was abandoned following the revolution given the negative effect of these general mortgages on economic life. The development towards the renewed acceptance of such mortgages (a Wiederkehr der Rechtsfiguren) does, however, fit very well in a broader global development towards acceptance of general security interests that rest on both present and future property to secure both present and future debt. 58 With regard to real security on immovables, German mortgage law is seen as an interesting model. Under German law a mortgage on an immovable does not necessarily have to be accessory to the debt, meaning that the moment the loan is repaid the mortgage does not 57 The model can be found on the EBRD web site: 58 Cf. for the Wiederkehr der Rechtsfiguren (return of legal models) W. Wiegand, Die Entwicklung des Sachenrechts im Verhältnis zum Schuldrecht, Archiv für die civilistische Praxis 1990, p. 112 ff., p. 132; Th. Mayer-Maly, DieWiederkehr von Rechtsfiguren, Juristenzeitung 1971, p. 1 ff.; cf. for the Netherlands already J.P.A. Coopmans, Renaisssance van oud recht, (Deventer: Kluwer, 1965). With regard to the (renewed) acceptance of general security interests reference can be made to the 10 core principles for a secured transactions law, to be found on the following web site of the European Bank for Reconstruction and Development: 25

116 always immediately extinguish. This is the model of the Grundschuld, which has inspired proposals to introduce a European wide uniform mortgage on real property, the so-called euromortgage. 59 Recently, also a French working group chaired by M. Grimaldi, which proposes a fundamental revision of the law on personal and real security interests and to add a new book on security interests to the French Civil Code, suggested to introduce in France a non-accessory type of mortgage ( hypothéque rechargeable ). 60 The new Netherlands Civil Code has also acted as a point of reference, especially in countries with an economy in transition. To what degree the Netherlands property law can continue to be a model at the European level is unclear. Various fundamental policy choices made during the drafting of the rules on property law are now under pressure as a direct result of European and global developments. This is especially true for the ban on the use of ownership for security purposes, laid down in article 3:84(3) of the Netherlands Civil Code. Ownership is used widely as security and it can therefore be no surprise that in the Grimaldi report the use of ownership for security purposes is accepted for France. I have only mentioned a few legal systems that could be a potential model for a future uniform property law. Also other legal systems could have been mentioned. A very interesting development is not to take a particular national model as a starting point for legal unification, but a truly international model, that is the result of thorough comparative analysis. The model is then tested by making it compete with existing (national) models to see if the new model will be accepted broadly. A European example in the area of private law is the so-called common frame of reference, as yet in its drafting stage, aimed at presenting a system of guiding principles and rules that can be used as a tool to analyse the existing European law (the acquis communautaire) from the perspective of consistency and effectiveness and acting as a basis for future European law. 61 Based upon this common frame of reference a so-called optional model will be developed that might be chosen by contracting parties involved in inter-state European business. This Common Frame of Reference, although its focus is first of all on contract law, may also deal with certain property law areas such as personal property security interests, given the importance of security for intra-european trade. 59 See the report by the Forum Group on Mortgage Credit, The integration of the EU mortgage credit markets (Brussels: European Commission, 2004) and recently the Green Paper Mortgage Credit in the EU (presented by the European Commission), Brussels, , COM(2005) 327 final, to be found at: 60 Groupe de travail relatif à la réforme du droit des sûretés, Rapport à Monsieur Dominique Perben, Garde des Sceaux, Ministre de la Justice and Avant-projet de texte issu du rapport Grimaldi (Paris, Ministére de la Justice, 2005), to be found at: 61 See for more information: 26

117 VI. Final remarks From a fairly static legal field, property law and hence comparative property law is developing into an increasingly dynamic legal area. This is most of all a consequence of regional and global economic integration and the resulting legal integration. 62 National property law, whether belonging to the civil law or the common law tradition, will undergo nolens volens the influence of economic integration. The law on land registries provides a good example as to how this might proceed. Here the impetus for unification is a desire to make information from a land registry that is available at the national level also accessible to others outside the national jurisdiction. In this way other foreign service providers, such as notaries and advocates, would have the same information as local service providers and could use that information to assist their clients in a more adequate way when these clients want to enter the foreign real estate market. National land registries have thus become an international source of information. 63 The very moment this has happened, the users will desire more. They will want to actually understand the information given to them. At this point, mere translation of foreign legal terms (what does owner mean?) will not be enough. A simple translation can hide even more than the original term. A mere translation of a foreign legal term may lead the foreign lawyer to believe that he or she fully understands the foreign legal regime and the result may be various degrees of misunderstanding. To avoid this, it will first of all be necessary to draft not only a list of legal translations, but also to provide the context of these translations. In other words, not only a glossary is needed, but also multilingual legal dictionaries. That cannot be done without thorough and in-depth comparative property law studies. The creation of an integrated market of legal services will, however, require more. In order to effectively not only understand the information available from the various land registries, but also use it, pressure will arise to create a uniform legal regime, particularly with regard to security interests. This is the only way in which, at the end of the day, truly efficient access to other markets will be possible. In fact, this development has already started in Europe through the proposals concerning the 62 Cf. the recently published paper by A. Bell and G. Parchomovsky, Of Property and Federalism (Bar-Ilan University Faculty of Law, Interdisciplinary Program for Law, Rationality, Ethics and Social Justice, Working Paper No and University of Pennsylvania Law School, Institute for Law and Economics, Research Paper No , te be found at the webiste of the Social Science Research Network: 63 See the European Land Information Service (EULIS) project: 27

118 euro-mortgage and worldwide through the creation of the (UNIDROIT) international security interest in mobile equipment. Looking at all of these developments, it can firmly be concluded that comparative property law was not so dynamic as, e.g., comparative contract or comparative tort law. However, this is changing fast and comparative property law is gaining importance rapidly. * Professor of civil law and European private law Maastricht University, Marie Curie Fellow, Centre for European Law and Politics at the University of Bremen. 28

119 From classical to modern European property law? Sjef van Erp 1 I. Introduction Although Prof. Konstantin Kerameus, one of the most outstanding comparative lawyers of the past decades, has focussed much of his research on comparative civil procedural law, also his knowledge and expertise with regard to the comparative law method as well as European Union law is greatly valued. In this contribution to the Festschrift published in his honour I will examine some fundamental aspects of European property law. Do European property law traditions share a common model of property law and, if this question is answered affirmatively, could this model be a foundation upon which European harmonisation and unification measures can be based? My thesis will be that the European property law traditions share a classical model of property law. A critical first analysis of this classical model will be offered, followed by an evaluation of the model from the perspective of an evolving European property law. Property law deals with the acquisition and distribution of wealth (possessions) in a society. As wealth can only be created if the existing legal framework that regulates its acquisition and distribution provides for stability and security, property law focuses on longlasting relations. This is one of the major structural distinctions between property law and the law of obligations, especially contract law. Contractual relations are more often than not of short duration, although of course some contractual relations and in particular complex 1 Professor of civil law and European private law, Maastricht University, the Netherlands. President of the Netherlands Comparative Law Association. I would like to thank the participants of workshops in Bremen (Centre of European Law and Politics) and Hamburg (Max Planck Institute for comparative and international private law) for their comments during a presentation of my ideas for this contribution. 1

120 arrangements such as large construction projects frequently may be of a long-term nature. 2 in Defined in legal terms someone s wealth is that person s patrimony. A patrimony has a positive side and a negative side. The positive side of a person s patrimony consists of the rights a person has against all other persons with regard to objects that exist in the world around him (someone s property or possessions ). What can be an object of property law depends upon what the legal system recognises as such. These objects can be corporeal, such as goods and land, or incorporeal, such as claims and ideas. Viewed from a negative side, a person s patrimony consists of the debts a person has toward other persons. Debts are generally owed to a specific other person. Debts (or obligations ) are the correlative of a right that another person has, but this right is of a personal nature in the sense that the duty attached to that right is only owed by one person. It is, therefore, interesting to see that civil law systems do not use the distinction between the various types of rights to create a classification within private law. With regard to personal rights the civil law focuses on the duty side and calls this area the law of obligations. It is with regard to rights against the world that the civil law focuses on the right. This area is called property law. In a creditordebtor relationship, the focus is on the duty or the debt (the negative side of the creditordebtor relationship) in case contractual problems arise, but the focus is on the claim (the positive side of the creditor-debtor relationship) if the relationship is looked at from the perspective of being an object of property law. Non-performance of a debt is a contractual matter; assignment of a claim is a property question. It could therefore be said that property law regulates the positive side of a partrimony and the law of obligations regulates the negative side. Of course, property law burdens other persons, but these burdens are not considered to be part of the negative side of someone s patrimony. The burdens are 2 Cf. I.R. Macneil, Relational contract: what we do and do not know, Wisconsin Law Review 1985, p. 483 ff. 2

121 considered to be general and create duties for everyone. They are not specific enough to be attributed to a particular patrimony. It could thus be said that property law is the legal basis for the creation (acquisition and distribution) of wealth. For this creation of wealth it is necessary that property law be aimed at establishing stability and legal security. Property law, therefore, concentrates on long-standing legal relationships and, given the impact of property rights as rights against everyone else, focuses on limitation of these rights. Because of these two reasons, this area of the law is generally considered to be more static than dynamic. In contract and tort law this is completely different. These areas are seen as more dynamic than static. Contract law has seen a development from a so-called static classical model to a dynamic model in which legal relationships, which develop over time, have become the starting-point for analysis. Pre- and post-contractual liabilities have been recognised and changed circumstances may lead to an adaptation of the contractual relationship. 3 Tort law is frequently seen as the expression of policy choices which have to be made between existing interests: which of these interests should be protected and, if so, to what degree? The right (and limitations of this right) to privacy is a good example of this approach. These policy choices may change, just as the interests to be protected may change. It seems that comparable dynamics cannot be found in property law. The effect was that property law became petrified or, as Libchaber has phrased it so eloquently, modern property law has entered a stage of belle endormie. 4 This static image of property law can be found in all property law traditions in Europe. Upon first sight, when looking at the common law, the civil law in its various styles (French, German and Scandinavian legal tradition), the transition systems in Central and Eastern Europe and the 3 Cf. S. van Erp, A European "culpa in contrahendo" doctrine? Towards a model of contract as a legal relationship and situation-specific duties to inform, in: S. Espiau Espiau and A. Vaquer Aloy, Bases de un Derecho Contractual Europeo/Bases of a European Contract Law (Valencia: Brant La Blanch, 2003), p. 67 ff. 4 R. Libchaber, La recodification du droit des biens, in: Le Code civil , Livre du bicentenaire (Paris: Dalloz and Litec, 2004), p. 297 ff., p I should add that Libchaber wrote this before the new French law on security rights had been enacted. See Ordonnance n du 23 mars 2006 relative aux sûretés, Journal Officiel n 71 of 24 March 2006 p ff. 3

122 mixed legal systems (Cyprus, Malta and Scotland), the various approaches to property law and the differences that exist between them seem to be written in stone. This view of property law, however, is rather deceptive, as I have indicated in my chapter on property law in the Oxford Handbook of Comparative Law. 5 First of all, within the various property law traditions far-reaching developments can be found, which as such justify a re-examination and rethinking of existing policies, principles, rules and concepts. I refer to what Vandevelde with regard to U.S. law has called the dephysicalisation of property: the increasing importance of intangible objects of property law, such as goodwill. 6 Secondly, when looking at these property law traditions from an external comparative viewpoint, it becomes clear that divergence at the level of rules and concepts is often not so deep-rooted as might be thought upon first analysis. Furthermore, a comparative study of the changes within the property law traditions shows that these changes are often the result of phenomena, which can be found everywhere in Europe. What Vandevelde has written concerning U.S. law about the dephysicalisation of property law, can also be applied to the European systems of property law. An example is emissions trade. The European Union, in order to implement the Kyoto Protocol, has set up a scheme for emission trading, which has been implemented in the laws of the Member-States. 7 Each legal system had to answer questions such as: what is an emission right ( allowance in European Union terminology), can emission rights be owned, how should emission rights be transferred, should this transfer be of a causal or of 5 M. Reimann and R. Zimmermann, The Oxford Handbook of Comparative Law (Oxford: Oxford University Press, 2006), p ff. 6 Cf. K.J. Vandevelde, The new property of the nineteenth century: The development of the modern concept of property, Buffalo Law Review 1980, p. 325 ff. and C.A. Reich, The new property after 25 years, University of San Francisco Law Review 1990, p. 223 ff. (1990). 7 See Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003, establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, Official Journal 2003, L 275/32 and Directive 2004/101/EC of the European Parliament and of the Council of 27 October 2004, amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol s project mechanisms, Official Journal 2004, L 338/18. 4

123 an abstract nature (in other words: should its validity be dependent upon the existence of a valid legal ground or not)? 8 In order to discover the changes in property law, I propose an analysis as has been put forward by the famous Oxford scholar Patrick Atiyah with regard to contract law. By describing and analysing what Atiyah saw as the classical model of contract law and comparing it with the model he saw appearing in modern case law, legislature and legal literature, he revealed the dynamics of contract law. 9 At the same time his analysis made clear that these dynamics could be found in all Western systems of contract law. Following his example I will be asking myself (1) whether a classical model of property law can be found as the underlying idea upon which the various property law systems in Europe are built and, (2) whether, in case such a classical model exists, modern property law differs from that model and, if so, in which respects. It will be clear that what follows can only be a proposal for further research, given the constraints of this contribution. II. A classical model of property law? (a) What is meant by classical model? When authors discuss the classical model of contract law, the word classical is used in a very specific way. It refers to how contract law was perceived during the codification era in Europe, in other words: the 19 th century and especially the beginning of the 19 th century. Generally, the characteristics of this classical model of contract law are rooted in two of the ideals of the French Revolution: freedom and equality. The ideal of fraternity did not really 8 Article 3 (a) of the 2003 directive gives the following definition: For the purposes of this Directive the following definitions shall apply: (a) allowance means an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable in accordance with the provisions of this Directive. 9 P.S. Atiyah, The rise and fall of freedom of contract (Oxford: Oxford University Press, 1979, reprint, 1985), p. 681 ff. 5

124 play a role at that time, or, to put it differently, freedom and equality were considered to be the expression of fraternity. Fraternity meant that everyone s freedom and equality would be assured. 10 These ideals led to the perception of contract law as being embedded in the will of the parties, irrespective of their social status and bargaining power. 11 In my view a classical model can also be found with regard to property law. 12 A major question, of course, is whether this classical model can be found in both civil and common property law. Civil property law is heavily influenced by the ideals (and ideology) of the French Revolution and its rejection of the feudal system. Under the feudal system a tenant held land from a lord, thus at the same time creating a bond of allegiance and a property relationship ( estate ) between them. 13 Before the French Revolution common and civil law had shared roots in this feudal system. 14 After the French Revolution the feudal system was abolished radically on the continent of Europe, but remained in the countries with common law. Although in these countries the feudal system gradually underwent several changes, and in fact now functions as the property law systems on the continent of Europe, the feudal system is still the historical foundation of the common law of property, as it can be found in England, Wales and Ireland. A more traditional type of feudal property law system still exists on the Channel Islands (Guernsey and Jersey). On the continent of Europe the 10 Cf. S. Schama, Citizens. A chronicle of the French Revolution (London: Penguin Books, 1989), p See J.H.M. van Erp, Contract als rechtsbetrekking. Een rechtsvergelijkende studie (Contract as a form of legal relationship. A comparative study) (Zwolle: W.E.J. Tjeenk Willink, 1990), p. 1 ff. 12 Cf. J.W. Singer, Propety and social relations: from title to entitlement, in: Ch. Geisler and G. Daneker (eds.), Property and values. Alternatives to public and private ownership (Washington and Covelo: Island Press, 2000), p. 3 ff. Singer s approach is aimed at replacing the classical ownership model by a social relations model. The concept of ownership plays a dominant role in his approach, which is more ideological than technical. See for such an approach also M.J. Horwitz, The Transformation of American Law (Cambridge, Mass., London: Harvard University Press, 1977), pp. 31 ff. and M.J. Horwitz, The Transformation of American Law The Crisis of Legal Orthodoxy (New York and Oxford: Oxford University Press, 1992), p. 145 ff. What I am interested in is whether and, if so, how far a classical model of property law, as can be found in the various 19 th century European property law traditions, still applies in the light of social, economic and cultural changes. The aim of my analysis is not redistribution of wealth through the development of new concepts or new models. 13 See W. Swadling, Property law: general principles, in: P. Birks, English private law, Vol. I (Oxford: Oxford University Press, 2000), p. 203 ff., p. 223 ff. 14 See Th. G. Watkin, An historial introduction to modern civil law (Aldershot, Brookfield USA, Singapore and Sydney: Aldershot and Dartmouth, 1999), p. 226 ff.; J.H. Baker, An introduction to English legal history (London: Butterworths LexisNexis, 2002), p. 223 ff. (real property) and p. 381 ff. (personal property). 6

125 feudal system of property law was replaced by a system based on Roman law that had been developed further by European legal science. The feudal system has also been abolished in the mixed jurisdiction of Scotland by the Abolition of Feudal Tenure etc. (Scotland) Act, 2000 asp Like on the continent of Europe, the feudal estate of dominium utile was replaced by a Roman law based concept of simple or outright ownership. Given the, certainly from a conceptual viewpoint, revolutionary changes on the continent of Europe at the end of the 18 th and the beginning of the 19 th century, I will start by outlining the classical model of property law from a civil law perspective. This will be followed by a brief analysis as to whether certain aspects of this model can also be found in modern common property law. It will be clear that such an analysis, given the nature of this essay, can only present a first impression, but still an impression that might be helpful in creating a common understanding of the essential characteristics of the European property law traditions. (b) Basic characteristics of the classical model: civil law The basic characteristics of the classical model of property law from a civil law perspective can be found in a highly interesting article written by Terrat, in the Livre du Centenaire commemorating 100 years French Civil Code (1904). 16 In this article he gives an overall view of the development of property law in France since the enactment of the French Civil Code, 15 See articles 1 and 2 of the act: Section 1 (Abolition on appointed day): The feudal system of land tenure, that is to say the entire system whereby land is held by a vassal on perpetual tenure from a superior is, on the appointed day, abolished. Section 2 (Consequences of abolition): (1) An estate of dominium utile of land shall, on the appointed day, cease to exist as a feudal estate but shall forthwith become the ownership of the land and, in so far as is consistent with the provisions of this Act, the land shall be subject to the same subordinate real rights and other encumbrances as was the estate of dominium utile. (2) Every other feudal estate in land shall, on that day, cease to exist. (3) It shall, on that day, cease to be possible to create a feudal estate in land. The appointed day was 28 November B. Terrat, Du régime de la propriété dans le Code Civil, in: Le Code Civil , Livre du centenaire, publié par la Société d Études Législatives, Tome Premier, Généralités Études spéciales (Paris: Arthur Rousseau, 1904), p. 329 ff. See also R. Libchaber, La recodification du droit des biens, in: Le Code civil , Livre du bicentenaire (Paris: Dalloz and Litec, 2004), p. 297 ff. 7

126 emphasising the strength of the code s underlying ideas. The property law model upon which the Civil Code was founded (typically a classical model of property law) was, very much like the classical model of contract law, an expression of the ideals of freedom and equality. In property law freedom and equality meant, first of all, freedom from the feudal system of land holding and abolishment of any special treatment based upon status in society (nobility, clergy, citizen). La Révolution, writes Terrat, qui avait affranchi la personne, voulut aussi affranchir la propriété ( ). 17 It also meant free transferability of property and severe curtailment of ways to create a mainmorte (inalienable property), e.g. by limiting the possibilities to create a fideicommissum (testamentary disposition under which, after the death of the first appointed heir, a second heir inherits the property). The desire to be free from the feudal system explains why servitudes, especially personal servitudes (usufruct), were looked upon with some suspicion. At all costs, the revival of feudal duties, be it directly through the (re)creation of manorial rights or indirectly through the law of servitudes, should be avoided. Remarkably enough, as a result, equality and freedom came into conflict here. On the one hand, equality meant that private parties should not be allowed to freely create duties vis-à-vis third parties, especially duties demanding from third parties to do something (positive duties). Vassals no more! 18 Freedom, on the other hand, meant that such a creation of duties, even of positive duties, was in the hands and at the discretion of private citizens. The fear of a revival of feudalism was, however, so strong that equality prevailed over freedom. In other words: the freedom of the parties had to be limited in the interest of equality to avoid any possible return of the feudal system. As a consequence freedom of contract did not apply with regard to property rights. As a consequence, property law had to be distinguished from contract law. In order to decide whether a legal relationship could be qualified as contractual (with the ensuing freedom of contract) or proprietary (with as a consequence severely curtailed freedom to 17 Terrat, Du régime de la propriété, p K.G.C. Reid, Vassals No More: feudalism and Post-feudalism in Scotland, European Review of Private Law 2003, p. 282 ff. 8

127 create rights and duties) a separation between the law of contract and the law of property had to be created. In Germany this separation became so strict that it led to the doctrine of the Eingeständigkeit des Sachenrechts. In the Netherlands it led a leading case quite remarkable for a civil law system that such a fundamental question had to be dealt with in case law! in 1905, in which the Netherlands Supreme Court laid down that the law of contract and the law of property were different in nature and therefore had to be distinguished with great care. 19 This separation not only affects the law of property and the law of contract, but also the law of tort. The separation between the law of property and the law of contract cannot be circumvented by the use of tort law. Let me give an example based upon the law of the Netherlands Antilles (in this respect the same as Dutch law). 20 A seller of land had not included in the contract of sale a duty to pay part of the proceeds of a plantation to the heirs of the original beneficiary of this clause ( heirs Boyé ). This duty was a so-called chain or perpetual clause, which had to be included in each contract of sale. In fact, the purpose of the clause was to create a ground rent, but it had not been established as a property right. The new buyer (the Island of Curaçao) refused to pay the duty and demanded a formal declaration from the court that this was justified. The heirs Boyé claimed that, because the Island of Curaçao should have known about the clause, the island was liable under tort law (negligence) to pay the amount of the duty. The Netherlands Supreme Court ruled that, although a tort claim was possible, courts had to be very careful in their analysis. In particular courts had to avoid giving proprietary effect to a clause that was of a contractual nature. It could be said that the Supreme Court refused to bypass the numerus clausus principle by only allowing the enforcement of contractual clauses vis-à-vis third parties under tort law within strict limits. If, 19 See M. Wolf, Beständigkeit und Wandel im Sachenrecht, Neue Juristische Wochenschrift 1987, p ff.; W. Wiegand, Die Entwicklung des Sachenrechts im Verhältnis zum Schuldrecht, Archiv fúr die civilistische Praxis 1990, p. 112 ff.; J. Th. Füller, Eigenständiges Sachenrecht? (Tübingen: Mohr Siebeck, 2006), p. 8 ff.. The Dutch case I refer to is Hoge Raad 3 March 1905, Weekblad van het Recht 1905, no (Blaauboer v. Berlips). 20 Hoge Raad 17 May 1985, Nederlandse Jurisprudentie 1986, 760 (Eilandgebied Curaçao v. Erven Boyé). 9

128 and this is another characteristic of the classical model of property law, parties would have wished to create rights against the world ( erga omnes ), they would have had to fulfil certain mandatory conditions. First of all, only a choice could have been made from a list of property rights and, within the list, the content of the various rights could only be modified if at all! to a very limited degree. Secondly, these rights had to be made public, either through registration (land), through possession (movables) or some different mode of information (claims). These two filters, created to decide whether a right is personal or proprietary in nature, resulted in two leading principles of property law, which are still applied: the numerus clausus principle and the principle of transparency. 21 The numerus clausus principle means that the number and content of property rights is limited and that the way in which these rights are created, transferred and extinguished is laid down in mandatory format. The transparency principle has two aspects: publicity and specificity. If third parties are to be bound by a right the creation of which happened without their consent, they must at least be able to gather information on such a right (requirement of publicity). If it were unknown what the object is of a proprietary right, third parties would still be insufficiently informed about such a right. Consequently, this object has to be clearly defined (requirement of speicifity). Non-fulfillment of the transparency principle would violate the ideals of freedom and equality and would therefore be unacceptable. General mortgages as were known in the feudal era, covering a person s whole possessions, were therefore suspect, even more so if they would not have been published (so-called sûretés occultes ). A further characteristic of the classical model of property law is the concept of ownership as the most comprehensive right possible and inviolable et sacré, which, because of individual freedom, was seen as a natural right belonging to each individual. All other 21 Cf. S. van Erp, European and national property law: Osmosis or growing antagonis? Sixth Walter van Gerven Lecture (Groningen: Europa Law Publishing, 2006), p. 14 ff. See also S. van Erp, A comparative analysis of mortgage law: searching for principles, in: M.E. Sánchez Jordán and A. Gambaro, Land law in comparative perspective (The Hague, New York and London: Kluwer Law International, 2002), p. 69 ff. 10

129 property rights give their holder a lesser content than ownership and are seen as burdening the right of ownership ( iura in re alinea ). The very moment these so-called limited real rights extinguish, the owner regains all the rights, privileges, powers and immunities to borrow the terminology from Hohfeld attached to being an owner. 22 This latter phenomenon is called the elasticity of ownership. It could, therefore, be said that the concept of ownership was the basis from which property law derived. This is why Wiegand can say that the numerus clausus of property rights is vorprogrammiert in this approach to property rights. 23 When the two filters of the numerus clausus principle and the transparency principle have been passed and it has become evident that a particular legal relationship is of a proprietary nature, the civil law applies certain ground rules. These ground rules also belong to the classical model of property law. 24 The first ground rule is the nemo dat (or nemo plus iuris) rule. A person cannot transfer more rights than that person has. The second rule is the prior tempore rule: a property right previously established has priority over a later property right. The exception is ownership itself, the concept of ownership being the foundation upon which the fabric of property law is built. Although ownership is the oldest right, still later limited real rights have priority over ownership. 25 Thirdly, limited rights have priority over 22 W.N. Hohfeld, Fundamental legal conceptions as applied in judicial reasoning, and other legal essays (New Haven: Yale University Press, 1923). For a critical analysis of Hohfeld s ideas see F.H. Lawson, Rights and other relations in rem, in: E. von Caemmerer, W. Hallstein, F.A. Mann and L. Raiser (eds.), Festscchrift für Martin Wolff, Beiträge zum Zivilrecht und internationalem Privatrecht (Tübingen: Mohr (Paul Siebeck), 1952, p. 103 ff. 23 Wiegand, Die Entwicklung des Sachenrechts, p For a further analysis of these ground rules see: S. van Erp, European and national property law: Osmosis or growing antagonis?, p. 16 ff. 25 Cf. M. Wolff and L. Raiser, Sachenrecht (Tübingen: Mohr/Siebeck, 1957), p. 177: Man kann sich das begrenzte Recht als verselbständigten Teilinhalt des Eigentums vorstellen: es erhält nichts, als was schon im unbelasteten Eigentum steckte. Allerdungs besteht bei einer Konkurrenz mehrerer begrenzter Rechte miteinander und mit dem Eigentum ein Rangverhältnis derart, dass die begrenzten Rechte dem Eigentum vorgehen und unter jenen das ältere dem jüngeren. Dieser "Vorrang" eines begrenzten Rechts stammt natürlich nicht aus dem Eigentum, da das unbelastete Eigentum keiner "Rang" hat (est die Mehrheit der Rechte ermöglicht Rangfragen) - Gerade damit ein Rangverhältnis möglich werde, kann der Grundeitentümer auch einen Teilinhalt des Eigentums verselbständigen, um ihn in eigener hand zu behalten: die Befugnisse, die das begrenzte Recht an eigener Sache gibt, waren sämtlicht schon im unbelsteten Eigentum enthalten; aber die Verselbständigung gibt dem 11

130 fuller rights. A right of mortgage is a limited real right that burdens the right of ownership. Although the owner is at the apex of the property law system, he has to accept that certain of his rights, privileges, powers and immunities have been given away to someone else with the power to enforce her rights against the owner. Finally, and this is the fourth ground rule, once it has been established that a right is a property right the law will give such a right special protection. An example is the right given to the owner to (re)claim his property from anyone who is holding it without title ( reivindicatio ). Other characteristics of the classical model of property law concern (1) the subjects who can be owner and (2) the objects of ownership. During the period in which this classical model was developed, i.e. before the Industrial Revolution, the focus was on the citoyen. The citoyen is an individual citizen with immovable property that allowed him to take part in commercial (and political) activities. The role of legal persons as owners remained underexposed. The highly individual nature of ownership can also be seen when looking at the French rule on co-ownership, laid down in article 815 Civil Code, that nul n est tenu de rester dans l indivision. 26 Everyone should have the right to terminate co-ownership and become a free individual owner again. As a consequence of this individual approach to property law the role of the family became more limited, although in the law of succession still certain family members were given a minimum share in the estate of a deceased. Finally, and this can still be seen in many legal systems, the classical model of property law focused on corporeal objects, not on claims and intellectual property. Furthermore, the focus was not only on corporeal objects, but also particularly on immovable property, especially land. This is certainly also true for the common law, which still traditionally makes a distinction between land law and personal property law, but it still also Eigentumstück im Verhältnis zum (Rest-) Eigentum und zu späteren Absplitterungen (Belastungen) einen Vorrang, den es ohne die Verselbständigung nicht gehabt hätte. 26 Terrat, Du régime de la propriété, p Article 815 C.C. reads: Nul ne peut être contraint à demeurer dans l'indivision et le partage peut toujours être provoqué, à moins qu'il n'y ait été sursis par jugement ou convention. 12

131 applies to civil law systems. Although it is a starting point for civilian legal analysis to state that the law of property is a unitary system of rules, nevertheless a distinction is being made between the objects of property rights. The rules on delivery are an example. Different rules apply to different objects (land, movables, claims). However, any sharp distinction between family property (particularly land) and property acquired by a person s own activities disappeared after the French Revolution, although this distinction can still be seen in some matrimonial property law systems. In matrimonial property law a regime may apply, which reserves to the individual spouse all the property that belonged to him or her before the marriage, including what this spouse receives as a result of succession and gift, and which creates common ownership with regard to what was acquired during the marriage. (c)basic characteristics of the classical model: common law It will be obvious that the classical model, outlined above, does not apply immediately and completely to the common law. First of all, the common law is still albeit more in theory than in practice rooted in the feudal system. Secondly, property concepts have not been derived from Roman law. English law still uses the concepts of estate and tenure in real property law, although this is different in personal property law. The idea of ownership as the most absolute right, at the apex of a system of property rights, can also not be found in the common law. Nevertheless, some common features can be found. First of all, also in the common law a distinction is made between property rights and personal rights. 27 The principles of numerus clausus and transparency also apply with regard to common property law, as well as the ground rules of nemo dat, prior tempore, limited rights have priority over fuller rights and 27 W. Swadling, Property law: general principles, p. 206 ff. 13

132 the special protection given to property rights. 28 It can be debated whether the freehold (fee simple) is or is not functionally equivalent to the civil law concept of ownership and the same question can be asked with regard to several other property rights under the common law. 29 For the time being, however, I would only like to stress that, although the classical model of property law is most clearly visible in the civil law, this does not mean that some of the most basic characteristics of the this model are absent in the common law. III. A critical first analysis of the classical model To a large extent the classical model of property law still is model that reasonably well explains the fundamentals of the civil (and to some degree also the common) law of property. There are several reasons for this. An important ground for the continued existence of the model is caused by its strength and effectiveness. Property law deals with long-standing relations. These long-standing relations are the legal foundations upon which economic wealth can be built. If private ownership is abolished and thus the classical model of property law is abandoned, as happened in so many countries after the rise of communism, wealth is lost. Although the state acquired wealth, private persons lost so much wealth that the losses were greater than the gains. The state proved, furthermore, to be incapable of producing the same wealth as private parties dealing with one another on a market. The classical model of property law proved to be more efficient and more able to maximise wealth than the Marxist model. From a comparative perspective it became apparent that the classical model of property law was simply the better model. This was not the first time that the classical model proved to be better than another model. It should not be forgotten that the classical model of 28 With regard to the applicability of the numerus clausus principle see W. Swadling, Property law: general principles, p. 206 ff. 29 See J. Gordley, Foundations of private law. Property, tort, contract, unjust enrichment (Oxford: Oxford University Press, 2006), p. 50 ff. 14

133 property law was the result of a rejection of the ancien régime and the feudal duties that belonged to it. The French Revolution led to a disenfranchisement of the nobility and growing prosperity for ordinary citoyens (particularly: middle class citizens). It proved to be creating more wealth than under the previously existing feudal system and also wealth that was also more justly distributed (although a truly fair distribution only came with the rise of the welfare state). To summarise in one sentence: the classical model of property proved to be a highly effective model. There also reasons at a more legal-dogmatic level, which explain the continued strength of the classical model of property law. As we have seen, the starting point of the model is a strict separation between the law of contract and the law of property. All European legal systems, albeit in varying degrees, still make a distinction between the law of property and the law of contract to create a balance between the old ideals of equality and freedom. In the law of contract freedom is the starting-point, of course within the limits set by mandatory law, public policy, good morals and good faith. In property law, binding formats are the starting-point, hence freedom is limited and mandatory law is prevalent. In his book Eigenstäniges Sachenrecht? Füller has made it very clear that even under German law the law of property cannot be completely separated from other parts of private law. For that reason he calls the difference between the law of obligations and the law of property a Scheindualismus. 30 However, some separation will be unavoidable in the light of the ideals underlying the classical model of property law, which until now have been supported broadly. The question then is, how far such separation should go and on this matter national systems of property law may and will differ. The leading principles and ground rules which are at the heart of the classical model of property law can still be found in the European property law traditions in spite of all the 30 J. Th. Füller, Eigenständiges Sachenrecht? (Tübingen: Mohr Siebeck, 2006), p. 526 ff. 15

134 social, economic and cultural changes in European societies since the 19 th century. It could, therefore, be argued that, irrespective of the way in which these principles and ground rules have been worked out in technical rules, also at a legal-dogmatic level the model has proved itself to be resilient. Given the aversion against the feudal system as it existed under the ancien regime, it is hardly a surprise that property law systems following the classical model were aimed at giving hard and fast inflexible rules. As a result property law systems tended to petrify. When bearing this in mind, it can also hardly come as a surprise that property lawyers have great difficulty rethinking basic policies, principles, rules and concepts. This is true at a strictly national level, but even truer at a supra-national level. If new regional or global initiatives are taken to harmonise or unify certain parts of property law (especially the law on real mortgages and personal property security interests), national property lawyers become hesitant. They are concerned about maintaining the coherence of their system to avoid instability and uncertainty. 31 Given the great value of certainty and stability, this approach is useful and makes sense. If, nevertheless, rejecting changes has as its main cause unwillingness to rethink existing policies, principles, concepts and rules then this approach should be abandoned. Also property law undergoes an evolutionary and thus gradual change, caused by changing social, economic, cultural and political conditions. The words of Libchaber in his article on recodification of property law in France, published in Le Code Civil , Livre du Bicentenaire, should in this light be reflected upon with great care: 31 Global and regional initiatives to harmonise or unify the law frequently receive a critical response by national lawyers. A major reason for this is that these initiatives are taken at a level where national lawyers have less influence than if these initiatives would be taken at a national level. National lawyers are also less informed about global or regional developments. As a consequence national lawyers often feel excluded. Cf. M. Kenny, Constructing a European Civil Code. Quis custodiet ipsos custodies, Columbia Journal of European Law 2006, p. 775ff. It will, therefore, be crucial for the development of a European property law that national lawyers get more actively involved in the harmonisation and unification process at a European level. This is a task, which not only rests upon the European institutions, but also upon national lawyers themselves. Inertia during the drafting process can never justify rejection of European initiatives afterwards. 16

135 Pourquoi faudrait-il renouveler une matière, qui est comme entrée dans le sommeil aussitôt après la promulgation du Code civil? Pourquoi faudrait-il la réveiller, alors aucun des indicateurs habituels ne manifeste son inadéquation aux besoins sociaux? ( ) Le défaut de rajeunissement qui se repére dans toutes les dimensions du droit des biens ne saurait apparaître comme le reflet de sa perfection, mais comme le symptôme de son épuisement. 32 Libchaber then goes on to consider what he calls the sclerosis of property law, advocating a rethinking of existing concepts, objects of property law and existing techniques. In this way unity in legal thinking could again be reached between the general law of property as it can be found in the Civil Code, the special rules on movable assets and claims, intellectual property law and commercial law. 33 Concerning existing concepts Libchaber defends the view that the concept of individual ownership should be reexamined. 34 Ownership in the hands of legal persons, especially large corporations, is of a different nature than ownership in the hands of a private individual. Also the unitary concept of ownership, developed as a reaction against fragmented ownership as it existed during the feudal era, should be reconsidered. Ownership is frequently used for security purposes, resulting in a division of rights between the legal owner (the creditor) and the economic owner (the debtor). Ownership can also be transferred for purposes of management, thus creating a trust. At this moment the French legislature, recognising this development, is considering the introduction of a civil law type of trust ( fiducie ). 35 With regard to objects Libchaber points out that the role of immovables as 32 Libchaber, La recodification du droit des biens, p. 297 and p Libchaber, La recodification du droit des biens, p High value movables are a good example of special rules on movables. Although these objects are movable (aircraft, railway rolling stock, space objects), they are nevertheless being treated as if they were immovable. This is done to avoid applicability of the rules on possession for the transfer of these movables and the creation of security interests. Possession is seen as an inadequate tool to provide the required information to third parties. For that purpose, as can be seen with regard to immovable property, a registration system is established. I refer to the Unidroit Convention on International Interests in Mobile Equipment (Cape Town, 2001); see the web site of Unidroit: For German law see Füller, Eigenständiges Sachenrecht, p. 550 ff. 34 Libchaber, La recodification du droit des biens, p. 302 ff. 35 Proposition de loi adoptée par le Sénat instituant la fiducie, transmise par M. le Président du sénat à M. le Président de l Assemblée Nationale, le 18 Octobre 2006, document no For the dossier legislatif see: The bill defines the fiducie as follows: Art La fiducie est l opération par laquelle un ou plusieurs constituants transfèrent des biens, des droits ou des sûretés, ou un ensemble de biens, de droits ou de sûretés, présents ou futurs, à un ou plusieurs fiduciaires 17

136 a source of wealth has been steadily declining, whereas the importance of movables and claims is growing. Furthermore, new objects of property law have been developed, such as the fonds de commerce (the business enterprise) and information as such (trade secrets). Derivative instruments (options, swaps etc.) could perhaps be added. Finally, new techniques are needed in the light of these changing concepts and objects. Libchaber mentions as an example of a new technique the growing importance of real subrogation: the status of objects, which replace other objects. In his view the sclerosis of property law can particularly be seen when looking at the traditional sources of property relationships, also considering the decline of the immovable as value. 36 Certain types of limited real rights have lost much of their meaning, giving the changing nature of what is seen as valuable. To add an example: In the Internet technology business, creativity (and hence: potential intellectual property) is of far greater value than traditional sources of wealth. When providing security for a loan, the law of real mortgages will hardly be relevant here, as more often than not the premises in which the business is located will not be owned by the entrepreneur, but rented. In the light of the foregoing, it cannot come as a surprise that the decline of the immovable as value is seen as the second major cause of sclerosis in property law. Nevertheless, although property law shows sclerosis in the details, in Libchaber s view the overall structure of property law still is fairly stable with ownership as its poutre maîtresse or clef de voûte. In other words: until today the classical model of property law has been a workable model. 37 IV. Conclusion qui, les tenant séparés de leur patrimoine propre, agissent dans un but déterminé au profit d un ou plusieurs bénéficiaires. Art La fiducie est établie par la loi ou par contrat. Elle doit être expresse. Art Le contrat de fiducie est nul s il procède d une intention libérale au profit du bénéficiaire. Cette nullité est d ordre public. 36 Libchaber, La recodification du droit des biens, p. 298 ff. 37 Libchaber, La recodification du droit des biens, p

137 The main characteristics of the 19 th century classical model of property law can be summarised as follows. The starting point is a clear separation between the law of obligations (especially the law of contract) and the law of property, in other words between personal rights (rights against a particular person) and absolute rights (rights against the world). Positive duties burdening third parties cannot be created through the law of contract and are avoided in the law of property. The freedom of parties to create rights vis-à-vis third parties is limited by two leading principles: the numerus clausus principle (limitation of number and content of absolute rights) and the transparency principle (information requirements: publicity and specificity). Once it has been established that a particular right can be qualified as a property right (i.e. an absolute right with effect erga omnes), certain ground rules apply: the nemo dat rule, the prior tempore rule, the rule that limited rights have priority over fuller rights and special protection rules, such as the right to reclaim property (in civil law systems, to give an example, the reivindicatio). The model focuses on land law, disregarding movables and claims. This classical model of property law is most clearly visible in the civil law tradition, but its basic characteristics as described above can also be seen in the common law tradition. In light of the changes, which occurred, after the classical model had been developed (the Industrial Revolution, the rise of movables and claims as a source of value and the dephysicalisation of property) the critical question can be asked whether this classical model still explains property law adequately. We have seen that Libchaber in an in-depth study discussed the sclerosis of property law, referring to concepts, objects and techniques of property law that are no longer used. In my view his analysis is correct. Property law systems have great difficulty adapting to such new objects as time-share arrangements (periodically returning ownership of a second home for a limited period), emission rights (the right to pollute), virtual property (domain names0 and what Reich has called the new property 19

138 (social security). 38 Although Libchaber mentions that ownership has remained the central concept of property law systems, still the civilian concept of ownership is undergoing fundamental changes. I already mentioned the proposals to introduce a civil law trust in French law. Such a civil law trust has not only already been recognised in such mixed jurisdictions as Scotland and South Africa, but also in other civil law systems. In Scotland the abolition of the feudal system and the introduction of simple or outright ownership did not have any impact on the recognition of these trusts. It could further be questioned to what degree property law really can and should be independent from the law of contract. To create a truly closed system of property law, which would not be dependent upon the uncertainties of contract law with its rules on void and voidable legal acts and its provisions concerning dissolution in case of non-performance, the law of obligations and the law of property will have to be watertight compartments. This is the principle of abstraction, which can be found in several areas of German property law. An example is the transfer system under German law. In German property law it is a starting point for legal analysis that the invalidity of an underlying sales agreement does not result in invalidity of the transfer. A further example can be found in German mortgage law. In case of the Grundschuld paying off the loan does not lead to an extinction of the security right. The policy behind this principle of abstraction is the promotion of stability and security in business transactions. Füller has shown that the strict independence of the German property law system can be seriously questioned. In French law a strict independence never really existed. Examples are the consensual system of transfer (a sales contract results in an immediate transfer of ownership of the object sold) and the accessority principle (connecting the security right with the underlying loan). Nevertheless, also in French law no complete open connection exists between the law of contract and the law of property. With regard to immovable property, a sale of land will not be effective 38 C.A. Reich, The new property, Yale Law Journal, 1964, p. 733 ff; see also Joshua Fairfield, Virtual property, Boston University Law Review 2005, p ff. 20

139 against third parties in good faith, unless it has been registered. In the new French law on security rights, the accessority principle no longer applies to reverse mortgages ( hypothèques rechargeables ). A possible return of the feudal system as it existed under the ancien régime is no longer is considered to be a realistic fear. This paves the way towards a more flexible numerus clausus principle and accept a, what I have called, quasi-numerus clausus. 39 Parties should be given more freedom to give shape to the property rights traditionally recognised and, albeit under strict conditions, they should be given the freedom to create new property rights. These rights do not necessarily have to be effective against the whole world, but could be effective against certain interested third parties. This is the background of the rules on qualitative duties in the Netherlands Civil Code. 40 Property law will then become borderline law, a legal area in which traditional property law is further developed through contract and tort law. The classical model of property law, when brought back to its leading principles and ground rules, still applies today, but without the rigour that sometimes was so characteristic of its application in the past. This trend towards relaxation and flexibility is a conditio sine qua non for the development of property law in an era characterised by regional and global economic integration, with its resulting osmosis between national, European and global property law. 39 S. van Erp, A numerus quasi-clausus of property rights as a constitutive element of a future European property law?, Vol. 7.2 Electronic Journal of Comparative Law, (June 2003), 40 See article 6:252 Neth. C.C. 21

140 Hilary Term [2012] UKSC 6 On appeal from: [2010] EWCA Civ 917 JUDGMENT In the matter of Lehman Brothers International (Europe) (In Administration) and In the matter of the Insolvency Act 1986 before Lord Hope, Deputy President Lord Walker Lord Clarke Lord Dyson Lord Collins JUDGMENT GIVEN ON 29 February 2012 Heard on 31 October, 1, 2 and 3 November 2011

141 Appellant Antony Zacaroli QC David Allison Adam Al-Attar (Instructed by Allen & Overy LLP) Respondent CRC Credit Fund Limited Robert Miles QC Richard Hill (Instructed by Simmons & Simmons LLP) Respondent Lehman Brothers Finance AG Jonathan Crow QC Jonathan Russen QC Richard Brent (Instructed by Field Fisher Waterhouse LLP) Respondent Lehman Brothers Inc. Jonathan Crow QC Jonathan Russen QC Richard Brent (Instructed by Norton Rose LLP) Respondent Administrators Iain Milligan QC Rebecca Stubbs Richard Fisher (Instructed by Linklaters LLP) Intervener (by written submissions) David Mabb QC Stephen Horan (Instructed by the Financial Services Authority)

142 LORD HOPE 1. This appeal is concerned with the meaning and application of the client money rules and client money distribution rules contained in Chapter 7 of the Client Assets Sourcebook ( CASS 7 ) issued by the Financial Services Authority for the safeguarding and distribution of client money in implementation of the Markets in Financial Instruments Directive 2004/39/EC ( MiFID ). The central feature of the client money rules is the requirement that CASS 7 imposes on MiFID firms to segregate money that they receive from or hold for or on behalf of their clients in the course of MiFID business by placing it into a client money account so that it is kept apart from the firm s own money. 2. Under English law the mere segregation of money into separate bank accounts is not sufficient to establish a proprietary interest in those funds in anyone other than the account holder. A declaration of trust over the balances standing to the credit of the segregated accounts is needed to protect those funds in the event of the firm s insolvency. Segregation on its own is not enough to provide that protection. Nor is a declaration of trust, in a case where the client s money has been so mixed in with the firm s money that it cannot be traced. So segregation is a necessary part of the system. When both elements are present they work together to give the complete protection against the risk of the firm s insolvency that the client requires. That is why rule 14.1 of the Solicitors Regulation Authority Accounts Rules 2011 provides that client money must without delay be paid into a client account, except when the rules provide to the contrary. Rule 6.3.1(b) of the Law Society of Scotland Practice Rules 2011 contains a provision to the same effect. The Law Society of Scotland s guidance to rule 6.3.1(b) states that without delay normally means on the same day. 3. These elementary principles were adopted by section 139 of the Financial Services and Markets Act 2000 ( the 2000 Act ) when the rule making powers conferred on the FSA relating to the handling of client money were being formulated. CASS 7 provides for the segregation of client money, and it creates a statutory trust over client money to support and reinforce the purposes of segregation. This ensures that client money is kept separate and not used for the firm s own purposes. It protects the segregated funds from the claims of the firm s creditors in the event that protection is most needed, which is the firm s insolvency. It also enables client money to be returned to the clients without delay, as it is beyond the reach of the firm s creditors. If the system works in the same way as it does under the accounts rules that regulate the activities of solicitors, the clients whose money has been segregated will be assured that their client money entitlement is not depleted by having to share the money in the clients account Page 2

143 with others who may have claims against the firm, such as those whose client money has not been segregated and those for whom the firm does not hold any client money at all. 4. The rules that CASS 7 sets out are complex, and in the present case they have given rise to many problems. This appeal raises three issues that are of fundamental importance to the way the system that CASS 7 lays down is to be worked out. The first is when does the statutory trust arise? Does it arise only when the money has been placed in a segregated client account, or is the money subject to the trust as soon as it is in the firm s hands irrespective of where it puts the money? If the latter is the case, the trust will extend to any client money that is held in the firm s house account and has not yet been segregated as well as to money that has been segregated. 5. The second and third issues are concerned with what happens to client money in the event of the failure of the firm (described by CASS 7 as a primary pooling event ). The second is directed to the rules that CASS 7 lays down for the way client money is to be distributed should that event occur. It asks whether these arrangements apply to money that is identifiable as client money in the firm s house accounts or only to money that is in the segregated client accounts. The third asks whether the right to participate in the pool that is to be distributed rateably to the clients is given only to those clients for whose benefit client money is held in the segregated client accounts, or whether a client whose money ought to have been segregated but was being held in a house account when the event occurs is entitled to participate in that money too. 6. I have had the great advantage of reading in draft Lord Walker s judgment, in which the background to the issues that we have to consider is so fully and carefully set out. Those who are interested will find most of the provisions of CASS 7 that are relevant to those issues set out in appendix 1 to the judgment of Arden LJ in the Court of Appeal [2011] Bus LR 277, 325. There are some omissions, but they are not important. All the provisions that Lord Walker refers to in his analysis of the points that matter are to be found there. 7. As to the first issue, which is the time at which the statutory trust arises, I agree for the reasons Lord Walker gives that the trust arises on receipt of the money. But I have also found it helpful to consider the issue from the position of Scots law. As Lord Walker has explained in para 47, it is clear that CASS 7 was intended when transposing the Directives into national law to make use of the concept of holding money on trust. But this is expressed by section 139(1) of the 2000 Act to be the position in relation to England and Wales and Northern Ireland only. Section 139(3) provides: Page 3

144 In the application of subsection (1) to Scotland, the reference to money being held on trust is to be read as a reference to its being held as agent for the person who is entitled to call for it to be paid over to him or to be paid on his direction or to have it otherwise credited to him. This provision is carried forward into the description of the statutory trust in section 7.7 of CASS which Lord Walker has quoted in full in para 41, below. 8. The wording of section 139(3) might be taken as an indication that the concept of trust is unknown in Scots law. That would be a misconception. There certainly is a law of trusts in Scotland. This has been recognised from time to time by statute: see, for example, the Trusts (Scotland) Act 1961 and section 17(5) of the Trustee Investments Act There are significant differences between English and Scots law as to its nature and origin. For example, the law of Scotland does not accept that a relationship in trust can arise in equity. It has a more limited basis. Its origin can be traced back to mandate or commission, which is part of the law of obligations: Stair, Institutes of the Law of Scotland (1693), I Various attempts have been made to explain the basis for the concept. They have not been successful, as its nature is considered to be of too anomalous a character to admit of a precise definition. But it can at least be said that the duty that the trustee owes to the beneficiary is fiduciary in character: Wilson and Duncan, Trusts, Trustees and Executors 2 nd ed, (1995), para In Council of the Law Society of Scotland v McKinnie 1991 SC 355 a question arose as to the character of funds held by a solicitor to the credit of his client account as at the date of his sequestration under section 31(1) of the Bankruptcy (Scotland) Act Delivering the opinion of the court Lord President Hope said at pp : The order of priority in distribution which is prescribed by section 51 of the 1985 Act leaves no room for doubt that if sums at credit of the clients account were to be regarded as having vested in the permanent trustee, these funds would be exposed to the claims of all those entitled to a ranking on the debtor s estate. But property held on trust by the debtor for any other person lies outside this scheme of distribution altogether. Section 33(1)(b) of the Act provides that such property shall not vest in the permanent trustee. So if sums at credit of the clients account are to be regarded as having been held by the solicitor on trust on his client s behalf, it must follow that these sums do not vest in the Page 4

145 permanent trustee on the sequestration of the solicitor, and accordingly that the judicial factor was right to resist the instruction by the accountant that the sums held on clients account in this case were to be made over to the permanent trustee. We are in no doubt that sums held to the credit of the clients account are fiduciary in character and that for this reason they are sums to which section 33(1)(b) of the 1985 Act applies. It is well settled that a solicitor stands in a fiduciary relation to his client in regard to all sums of money which he has received on the client s behalf. 10. Authority for the proposition in the last sentence of that passage is to be found in Jopp v Johnston s Trustee (1904) 6 F In that case a law agent sold shares belonging to his client Mrs Jopp and lodged the money that he received for them in his own bank account, which at that time was in credit. He later died insolvent and his estates were thereafter sequestrated. It was held that, as he was in the position of a trustee in regard to the sum realised by the sale of his client s shares, the amount in his account at his death which represented the trust money still belonged to his client and did not form part of his sequestrated estate. The case was concerned principally with the problem that had been created by the fact that the client s money had been mixed by the law agent with his own funds. But some passages in the opinion of Lord Justice Clerk Macdonald are of particular interest in the present context. 11. At p 1034 the Lord Justice Clerk said: Now, there can be no doubt whatever that throughout the whole time during which the price of these shares was dealt with, Mr Johnston stood in a fiduciary relation to Mrs Jopp. At p 1035 he referred to, and adopted, the solution to the problem that was to be found in English law: I have no difficulty in holding with Sir George Jessel MR in the case of In re Hallett s Estate (1880) LR 13 Ch Div 696, 719, that, as he quoted from Lord Hatherley, if a man mixes trust funds with his own, the whole will be treated as [the] trust property, except [ ] so far as he may be able to distinguish what is his own. It is no doubt true that Mr Johnston was not in the strict sense of the word Mrs Jopp s trustee. He was undoubtedly, while he held the money, under Page 5

146 the obligations of trust, the obligation to hold it for another and to deal with it solely for that other s interest. After referring to a passage in the judgment of Thesiger LJ in Hallett at p 723 to the same effect, he added these words: Now, here, whatever Mr Johnston did, the fiduciary relation of agent undoubtedly subsisted, and to have uplifted the whole of these deposit-receipts and used the contents for his own purposes would undoubtedly have been an absolute breach of his duty and the fiduciary position in which he stood. 12. I think that these passages tell us two things. The first thing is that, while Scots law has no difficulty in using the word trust in this context, the concept is more accurately and precisely analysed by referring to the fiduciary duty that the agent owes to his client with regard to money that he holds on his client s behalf. So the fact that a statutory trust is rejected by section 139(3) of the 2000 Act in favour of agency in the application of section 139(1) to Scotland, while at first sight surprising, does appear to have some basis in the language that was used to explain the relationship in Jopp v Johnston s Trustee. 13. We were shown a copy of a letter by the Chairman of the Scottish Law Commission, Lord Drummond Young, to the Advocate General for Scotland dated 28 September 2010 in which the Advocate General s attention was drawn to section 139(3) of the 2000 Act, to CASS 7.7.1G and to an almost identical provision which is to be found in Chapter 5.3 of CASS in respect of insurance moneys. Inquiries by the Commission s trust team of lawyers in HM Treasury had received a reply to the effect that the instructions for the 2000 Act did not disclose a policy reason for the choice of agency. It appeared that an identical provision in section 55(5) of the Financial Services Act 1986 had been adopted without any independent policy consideration being given to the matter when the 2000 Act was being prepared. The question was raised as to whether the CASS rules would achieve the intended level of client protection in the event of an insolvency north of the border. 14. This brings me to the second point that can be taken from the passages that I have quoted from Jopp v Johnston s Trustee. It is directed to the question of how the agency approach that must be applied in Scotland can guide us towards a solution of the issues raised in this appeal. I would approach this question on the assumption that it was the intention of Parliament to provide the same level of client protection north of the border as was to be available in England and Wales and in Northern Ireland. This assumption is based on the fact that no policy reason Page 6

147 has been disclosed for the different treatment that the legislation has laid down for the application of section 139(1) of the 2000 Act to Scotland. The explanation for the difference may lie with the Parliamentary draftsman in the Lord Advocate s department. It is the kind of thing that would be picked up when he was checking through the legislation to see whether it should be expressed differently in the terminology of Scots law so as to achieve what he understood its effect to be in the other parts of the United Kingdom. The Lord Justice Clerk s opinion in Jopp v Johnston s Trustee would have provided him with the terminology he was looking for. 15. Returning then to the first issue, which is the time at which the statutory trust arises, the solution that would be arrived at under the agency approach is very simple. As Lord Justice Clerk Macdonald said in Jopp v Johnston s Trustee at p 1034, the agent stands in a fiduciary relation to his client throughout the whole time that the client s money is in his hands. The relationship from start to finish is one of agency. At no stage does the money cease to be the client s money and become the property of the agent. The fiduciary relationship which gives rise to the statutory trust arises on receipt of the money. There is no interval between the moment of receipt and the commencement of the fiduciary relationship during which the agent can treat the money as his own. The relationship remains throughout the period while the money is held in a client or house account until the obligation to the client has been discharged. That was held to be the position in Council of the Law Society of Scotland v McKinnie, and I would apply the same reasoning here. So if this were a Scottish case I would have no difficulty in adopting the reasons that Lord Walker gives in para 63. As he explains in para 76, the clear conclusion he reaches on the first issue is that the effect of CASS 7 is that under the alternative approach referred to in , as well as under the normal approach referred to in , a firm receives and holds clients money as a trustee, with the beneficial ownership remaining in the clients. I have no doubt that the law of Scotland would arrive at the same conclusion. 16. Lord Walker found it helpful to consider the third issue, which is whether participation in the client money pool ( CMP ) is dependent on actual segregation (in other words, how the CMP is to be distributed), before the second issue, which is whether the primary pooling arrangements apply only to the client money in house accounts (in other words, what is to go into the CMP): see para 89. I agree, and like him I would approach the third issue on the basis that the CMP consists of the aggregate of the segregated funds holding clients money immediately before the primary pooling event ( PPE ). I also agree that the words each client in the rule of distribution set out in 7.9.6R(2) must be taken in context to mean each client for whom client money is held as identified in the last reconciliation before the PPE. The agency approach would lead one to expect that the CMP was to be distributed on the basis of what has been referred to as the contributions theory, rather than on the basis of the claims theory. Sums received from or on behalf of Page 7

148 the client are fiduciary in character. They retain that character until all the obligations arising from the fiduciary relationship are discharged. The fiduciary relationship protects them from being used to meet claims against the agent for breach of duties that he owes to others. It would be surprising if the rule of distribution was intended to have the effect of removing that protection, which is what the claims basis of distribution would achieve. As I see it, clear language would be needed to achieve such a paradoxical result. 17. Lord Dyson says in para 144 that the general scheme of CASS 7 is that all client money is subject to a trust that arises upon receipt of the money by the firm and that the distribution rules are intended to protect all the clients money received prior to a PPE. He disagrees with Lord Walker s description of the notion that clients must be taken to have implicitly accepted the risk, on a PPE, of having to share their segregated funds with non-segregated clients as unrealistic. He finds nothing surprising in the notion that, once a PPE occurs, the treatment of client money is subject to a different regime from that to which it was subject before. Lord Neuberger of Abbotsbury MR was of the same view in the Court of Appeal. In para 216 he said that it seemed to him unlikely that the FSA would have intended that client money which had yet to be segregated was intended to be treated differently from client money which had been segregated either under the normal approach or under the alternative approach. 18. I find it hard to understand, for my part, why it should be thought that it was the intention of the FSA to depart from the basic principles upon which the rules that regulate the activities of solicitors have been based. As I explained at the outset of this judgment, a declaration of trust, in a case where a client s money has been so mixed in with the firm s money that it cannot be traced, is not enough to provide the protection that the client needs in the event of the firm s insolvency. Segregation is a necessary part of the system. When both elements are present they work together to give the protection that the client requires. To construe CASS 7 in the way Lord Dyson suggests would have the effect of depriving the client of the protection which the rules were designed to achieve at the very moment when it is most needed. It is not just the exceptional nature of the facts of this case that make the consequences of his approach so striking. It affects every client whose money is handled by any firm operating in the area of MiFID business, however large or small that amount may be. If authority is needed to show that the requirement of segregation is crucial for their protection and how segregation works hand in hand with the fiduciary character that is attached to the funds that are segregated, it can be found in the observations by Professor Gower in his report, Review of Investor Protection which are quoted by Lord Collins in para 186, in the consultation papers to which he refers in para 187 and in Council of the Law Society of Scotland v McKinnie 1991 SC 355 to which I refer in para 9, above. Page 8

149 19. Like Lord Walker, I agree with the conclusion that Briggs J reached as to the effect of the final words of 7.9.6R(2) ( calculated in accordance with CASS 7.9.7R ). Their effect, as Briggs J said in para 255, was to provide a basis for the client s rateable participation in the CMP. It makes mandatory in the event of a PPE the standard method of money reconciliation that is set out in Annex 1 to CASS 7. Given that it is to be expected that this exercise will have been carried out according to the rules at the Point of Last Segregation ( PLS ), it is hard to see why it must be gone over again now. But whatever the purpose is that this rule is designed to serve, it does not contain a direction of the kind that I think would be needed to override the protection that attaches to the money that clients have actually contributed in consequence of the fiduciary relationship. I agree with Lord Walker that GLG s appeal on the third issue should be allowed. 20. The second issue has to be approached on the assumption that there were movements in the client money requirement during the gap period between the PLS and the PPE and that significant sums of client money were still traceable in the house accounts at the PPE. As Lord Walker points out in para 101, the issue resolves itself into a contest between what has been referred to as the final reconciliation theory and the general trust law theory. The problem is best focussed by looking at the position of the unsegregated last minute provider of client money. Is that client to be left to claim against LBIE as an unsecured creditor, or is its contribution to be protected in the same way as the contributions of those whose money was contributed before the PLS? Here again the agency approach tends to indicate that the money that this client provided should be protected by the fiduciary obligation which attached to that money as soon as it was received by LBIE. The alternative is hard to reconcile with the fiduciary relationship, which must be taken to have been designed to protect the client from having to claim under the general law of insolvency. 21. It was accepted that there is nothing to prevent a final internal reconciliation from being carried out to take account of movements in clients entitlements during the gap period. In any event I would so read the relevant provisions of CASS 7. That being so, I do not find it difficult to conclude, in agreement with Briggs J and Lord Walker, that this is what ought to be done in this case. I would therefore dismiss GLG s appeal on the second point and make the order which has been proposed by Lord Walker. 22. The question raised by the Scottish Law Commission as to whether the same level of client protection is available in Scotland as elsewhere in the United Kingdom may not have been entirely resolved by the way the questions before us in this appeal have been answered. But it respectfully seems to me that the direction in section 139(3) of the 2000 Act that the reference to money being held on trust is to be read as a reference to its being held as agent offers a level of protection that is no less effective. This is because it is to be assumed that the Page 9

150 relationship between the agent and the client is a fiduciary relationship of the kind identified in Jopp v Johnston s Trustee and Council of the Law Society of Scotland v McKinnie. It is worth noting too that I have found it helpful to examine the problems that this case gives rise to by assuming that the relationship between LBIE and its clients was indeed one of agency. The clarity with which the effect and consequences of that relationship has been described is compelling. As it is to be assumed that the protection given by the trust approach was intended to be just as effective, I think that the Scottish approach provides strong support for the conclusions that Lord Walker has reached in accordance with the direction in section 139(1) of the Act that applies to England and Wales. 23. I share Lord Walker s concern at the effect of the answers that the majority give to the second and third issues, and especially to the third issue which is so crucial to the protection of investors generally. LORD WALKER Introduction 24. Lehman Brothers International (Europe) ( LBIE ) is incorporated in England as an unlimited company with its head office in London. It was the principal European trading company in the Lehman Brothers group. It was authorised and regulated by the Financial Services Authority ( FSA ). LBIE was not a licensed deposit-taker but it was authorised to hold clients money. Its ultimate holding company is Lehman Brothers Holdings Inc ( LBHI ), a company incorporated in Delaware and based in New York, now in Chapter 11 bankruptcy. LBIE was put into administration by an order of Henderson J made before the opening of business on Monday, 15 September Many difficulties have arisen in the administration and the administrators have made several applications to the Companies Court for directions under paragraph 63 of Schedule B1 to the Insolvency Act Probably the most contentious and difficult of these is the client money application, which has led to this appeal. Nine representative claimants were joined as parties to argue the issues. On 15 December 2009 Briggs J, after a twelve-day hearing, made an order giving directions on a range of issues concerned with client money: [2009] EWHC 3228 (Ch), [2010] 2 BCLC 301. Some of the issues were matters of detail but others are of general and fundamental importance to LBIE s clients. Four of these general issues were made the subject of an appeal to the Court of Appeal, and on 2 August 2010 the Court of Appeal (Lord Neuberger of Abbotsbury MR, Arden LJ Page 10

151 and Sir Mark Waller) allowed the appeal on two of the four issues: [2010] EWCA Civ 917, [2011] Bus LR 277, [2011] 1 CMLR 27, [2011] 2 BCLC Permission to appeal or cross-appeal to the Supreme Court was granted on three of those issues. They are closely interconnected, and all of them depend on the application (to a complicated set of assumed facts) of what is known as CASS 7, that is, chapter 7 (Client money: MiFID business) of the Client Assets Sourcebook issued by the FSA. MiFID is an abbreviation for the Markets in Financial Instruments Directive 2004/39/EC and CASS 7 has evolved from earlier regulatory instruments into a form intended to transpose MiFID and its Implementing Directive, Commission Directive 2006/73/EC dated 10 August The FSA s powers of making rules and publishing guidance are conferred by sections 138, 139, 155 and 157 of the Financial Services and Markets Act 2000 ( FSMA ). Section 139(1)(a) expressly permits rules to make provision which results in clients money being held on trust in accordance with the rules. 27. At the beginning of his judgment Briggs J (paras 2 to 7) gave an introduction to the problems in terms which I gratefully adopt: 2. When first read, CASS 7 appears to provide a relatively straightforward and intelligible code for the safeguarding of client money by regulated firms. In the barest outline, it provides for client money to be identified and promptly paid into segregated accounts, segregated that is from the firm s house accounts. It provides for client money to be held on trust, in substance for the clients for whom it is received and held. Finally in the event of the failure of the firm, the rules provide for the pooling of the client money, thus far segregated and held on trust, and for its distribution to those entitled to it under that trust, pari passu in the event of a shortfall. 3. In an ideal world, the flawless operation of the scheme created by the CASS 7 rules would ensure first, that the clients money could not be used by the firm for its own account and secondly, that upon the firm s insolvency, the clients would receive back their money in full, (subject only to the proper costs of its distribution) free from the claims of the firm s creditors under the statutory insolvency scheme. The rules would achieve those twin objectives by ensuring that, promptly upon receipt, client money was held by a firm as trustee, separately and distinctly from the firm s own money and other assets, and therefore out of the reach both of the firm (for the conduct of its business) and of the firm s administrator or liquidator upon its insolvency (for distribution among its creditors). Page 11

152 4. In the imperfect and hugely complex real world occupied by LBIE and its numerous clients, there has on the facts which I am invited to assume for present purposes been a falling short in the achievement of both of those objectives on a truly spectacular scale. This shocking underperformance has occurred for a number of reasons, of which two stand out as prime causes. The first is that (again on the facts which I am invited to assume) LBIE failed to identify as client money, and therefore also failed to segregate, vast sums received from or on behalf of a significant number of its clients. In this respect, the most significant group of clients whose money LBIE failed to segregate were its own affiliates, that is members of the Lehman Brothers group of companies of which [LBHI] is the ultimate parent. Those affiliates have advanced client money claims against LBIE in aggregate exceeding US$3 billion. To put that extraordinary amount in perspective, the aggregate of the amounts actually held by LBIE in segregated accounts for clients for which it recognised a segregation obligation pursuant to CASS 7 when it went into administration on the morning of 15 September 2008 had a face value of only US$2.16 billion approximately. 5. To the un-segregated affiliates claims in excess of US$3 billion must be added claims of independent clients of LBIE who have challenged LBIE s treatment of its relationship with them as one of debtor/creditor rather than trustee and beneficiary, pursuant to the terms of its standard form contracts. The amount of undersegregation which may be attributable to that failure (if failure it be) has not been identified. In addition, LBIE routinely treated otherwise than as client money sums deriving from options and derivative OTC transactions with its clients, regardless of the terms of the agreements pursuant to which LBIE conducted such trading for those clients. The amount of potential segregation failure in respect of option transactions alone is said to have been US$146m. 6. The second main reason for under-achievement of the objectives behind the CASS 7 rules lies in the insolvent failure of another LBIE affiliate, Lehman Brothers Bankhaus AG ( Bankhaus ), with which LBIE had deposited no less than US$1 billion of segregated client money. Bankhaus was subjected to a moratorium by the German regulator on 15 September 2008, and insolvency proceedings in relation to it were commenced on 12 November The administrators have been unable even to hazard a guess at the amount, if any, of client money which may be recovered from Bankhaus. Thus, even if there were no claims at all by clients whose client money LBIE failed to segregate, there exists a real risk that the Page 12

153 shortfall on client account will exceed 40% due to the Bankhaus failure, quite apart from the costs and charges liable to be levied against the segregated fund in connection with its distribution, including the very large costs of this application. 7. The combination of a massive failure to identify and segregate client money, coupled with the credit loss shortfall attributable to the Bankhaus failure, has thrown up a series of fundamental problems in the interpretation and application of the rules in CASS 7 to LBIE s business and insolvency. The judge then went on to mention further complications and difficulties, some of which are still relevant to this appeal. 28. In the course of the appeal process the number of representative claimants has been reduced. Of the original nine only four have been parties to the appeal to the Supreme Court, as follows: (1) GLG Investments plc (subfund: European Equity Fund) ( GLG ) was the representative of LBIE s fully-segregated clients. It was the winner before Briggs J on issues 2 and 3 but the loser (with the benefit of a preemptive costs order) before the Court of Appeal on all three issues. It is the appellant (without the benefit of a preemptive costs order) in this court. GLG appeared by Mr Antony Zacaroli QC, Mr David Allison and Mr Adam Al-Attar. (2) CRC Credit Fund Limited ( CRC ) was the principal appellant before the Court of Appeal, as a representative of what Briggs J (para 25) referred to as the wholly unsegregated end of the spectrum. Having succeeded before the Court of Appeal it is the principal respondent (with the benefit of a preemptive costs order) before this court, and it has appeared by Mr Robert Miles QC and Mr Richard Hill. (3) and (4) Lehman Brothers Inc. and Lehman Brothers Finance AG ( the LB affiliates ) are, on the assumed facts, largely unsegregated clients of LBIE, but they have been joined and represented separately, at their own risk as to costs, because of their special position as members of the Lehman Brothers group. They have appeared by Mr Jonathan Crow QC, Mr Jonathan Russen QC and Mr Richard Brent, who have supported and supplemented the submissions made by Mr Miles. 29. The administrators have appeared by Mr Iain Milligan QC, Ms Rebecca Stubbs and Mr Richard Fisher. The FSA was represented by leading counsel Page 13

154 before Briggs J and the Court of Appeal. It has not appeared by counsel in this court but has made written submissions prepared by Mr David Mabb QC and Mr Stephen Horan. The FSA was generally supportive of the respondent claimants position. 30. In his judgment Briggs J had to answer no fewer than 26 questions, some of them subdivided. He had to go into a number of technical matters that arose from the complex and varied character of LBIE s trading activities, including futures, margins, currency transactions, stock loans, depot breaks, fails, and unapplied credits. Some of these terms are briefly explained in para 2.16 of the statement of assumed facts ( SAF ), most of which is reproduced in para 49 of Briggs J s judgment. In this court the argument has on the whole proceeded at a more general level. But at least a superficial acquaintance with some of the technicalities is necessary in order to understand the process of internal reconciliation of accounts that has to be undertaken on every business day by a firm operating the alternative approach described in paras 38 and 39 below. The Directives 31. MiFID (Directive 2004/39/EC of the European Parliament and of the Council, dated 21 April 2004) replaces Council Directive 93/22/EEC on investment services in the securities field. Its general purpose is set out in Recital (2): In recent years more investors have become active in the financial markets and are offered an even more complex wide-ranging set of services and instruments. In view of these developments the framework of the Community should encompass the full range of investor-oriented activities. To this end, it is necessary to provide for the degree of harmonisation needed to offer investors a high level of protection and to allow investment firms to provide services throughout the Community, being a Single Market, on the basis of home country supervision. Recital (26) refers to the importance of segregation of clients funds from those of the firm: In order to protect an investor s ownership and other similar rights in respect of securities and his rights in respect of funds entrusted to a firm those rights should in particular be kept distinct from those of the firm. This principle should not, however, prevent a firm from Page 14

155 doing business in its name but on behalf of the investor, where that is required by the very nature of the transaction and the investor is in agreement, for example stock lending. The Directive is intended to state broad general framework principles to be implemented later (recital (64)). 32. Article 13 (Organisational requirements) imposes on the home member state (that is, the state in which an investment firm has its registered or head office) the duty of requiring the firm to comply with the organisational requirements set out in paragraphs 2 to 8 of the article. These include: (7) An investment firm shall, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients ownership rights, especially in the event of the investment firm s insolvency, and to prevent the use of a client s instruments on own account except with the client s express consent. (8) An investment firm shall, when holding funds belonging to clients, make adequate arrangements to safeguard the clients rights and, except in the case of credit institutions, prevent the use of client funds for its own account. Paragraph 10 indicates that the Commission will by the Implementing Directive specify the concrete organisational requirements to be imposed on investment firms. 33. The Implementing Directive 2006/73/EC implemented MiFID as anticipated in article 13(10). In particular article 16(1) imposes on member states the obligation to require investment firms to keep and maintain records and accounts, to make regular reconciliations, and (in subparagraph (e)) to ensure that client funds deposited, in accordance with article 18, in [an institution authorised by article 18] are held in an account or accounts identified separately from any accounts used to hold funds belonging to the investment firm. Article 16(1)(f) requires member states to introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client assets, or of rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence. Article 18(1) provides that investment firms are to be required, on receiving any client funds, promptly to place those funds into one or more accounts with a central bank, an authorised Page 15

156 credit institution, a bank authorised in a third country, or a qualifying money market fund. 34. Article 4 of the Implementing Directive (additional requirements on investment firms in certain cases) is concerned with what has been referred to as gold plating that is, transposing the Directive into national law in a form that imposes on investment firms requirements not imposed by the Directive itself. Article 4(1) provides: Member states may retain or impose requirements additional to those in this Directive only in those exceptional cases where such requirements are objectively justified and proportionate so as to address specific risks to investor protection or to market integrity that are not adequately addressed by this Directive, and provided that one of the following conditions is met: (a) the specific risks addressed by the requirements are of particular importance in the circumstances of the market structure of that member state; (b) the requirement addresses risks or issues that emerge or become evident after the date of application of this Directive and that are not otherwise regulated by or under Community measures. Any such requirements are to be notified and justified to the Commission. No such notification or justification has been made in respect of CASS 7. Gold-plating was raised as an issue in the lower courts, as a possible argument against the imposition of an immediate trust of clients funds. It was not relied on by Mr Zacaroli in this court, but Mr Milligan mentioned it as a point which we might feel bound to consider of our own initiative. For my part I do not think it necessary to go further into the point. CASS CASS 7 (Client money: MiFID business) consists of nine sections, each subdivided into paragraphs containing mandatory rules (denoted R) and (distributed through the rules in smaller print) non-mandatory guidance (denoted G). Defined terms are printed in italics, the definitions being found in a separate glossary. So for instance para 7.1.1R (Application) tells the reader that: Page 16

157 This chapter (the client money rules) applies to: (1) A MiFID investment firm: (a) that holds client money... and para 7.1.2G tells the reader that CASS 7.2 (Definition of client money) sets out the circumstances in which money is considered client money for the purposes of this chapter. 36. There is also an annex setting out the standard method of internal client money reconciliation. The rules contain numerous cross-references to the Directives, to other chapters of CASS and to other FSA regulatory instruments including COBS (the current Conduct of Business Sourcebook) and SYSC (the part of the handbook on High Level Standards which has the title Senior Management Arrangements, Systems and Controls). 37. It is necessary to give a fairly full summary of CASS 7. For brevity I will refer to particular sections and paragraphs without the prefix CASS. The two crucial provisions are emboldened for emphasis. The general scheme of CASS 7 is that section 7.1 sets out the scope of the client money rules and section 7.2 defines client money, doing so by a wide general definition followed by numerous specific exceptions. There is no general exception for money belonging to an affiliated company (7.1.12G) R (discharge of fiduciary duty) lays down when money ceases to be client money. Section 7.3 lays down general organisational requirements, substantially reproducing article 13(8) of MiFID and article 16(1)(f) of the Implementing Directive. Section 7.4 (Segregation of client money) begins by reproducing the substance of article 18 of the Implementing Directive. It then addresses client bank accounts and sets out rules and guidance that call for detailed treatment. The direct quotations below follow the official text in the use of italics (though it can be something of a distraction) but use the same font size for rules and guidance alike R, reproducing the substance of article 16(1)(e) of the Implementing Directive, provides: A firm must take the necessary steps to ensure that client money deposited, in accordance with CASS 7.4.1R, in a central bank, a credit institution, a bank authorised in a third country or a qualifying money market fund is held in an account or accounts identified Page 17

158 separately from any accounts used to hold money belonging to the firm G provides: A firm may open one or more client bank accounts in the form of a general client bank account, a designated client bank account or a designated client fund account (see CASS 7.9.3G) G explains when and how a designated client account may be used G (payment of client money into a client business account) provides: Two approaches that a firm can adopt in discharging its obligations under the MiFID client money segregation requirements [defined in the glossary by reference to CASS 7.4.1R and CASS R] are: (1) the normal approach ; or (2) the alternative approach. 39. The following rules and guidance about the normal approach and the alternative approach must be set out in full. The alternative approach was first introduced in Originally its adoption required formal consent from the statutory regulator, but this requirement was replaced by the procedure in R: R A firm that does not adopt the normal approach must first send a written confirmation to the FSA from the firm s auditor that the firm has in place systems and controls which are adequate to enable it to operate another approach effectively G The alternative approach would be appropriate for a firm that operates in a multi-product, multi-currency environment for which adopting the normal approach would be unduly burdensome and would not achieve the client protection objective. Under the alternative approach, client money is received into and paid out of a firm s own bank accounts; consequently the firm should have systems and controls that are capable of monitoring the client money flows so that the firm comply with its obligations to perform reconciliations of records and accounts (see CASS 7.6.2R). A firm Page 18

159 that adopts the alternative approach will segregate client money into a client bank account on a daily basis, after having performed a reconciliation of records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank account and client transaction accounts to determine what the client money requirement was at the close of the previous business day G Under the normal approach, a firm that receives client money should either: (1) pay it promptly, and in any event no later than the next business day after receipt, into a client bank account; or (2) pay it out in accordance with the rule regarding the discharge of a firm s fiduciary duty to the client (see CASS R) G Under the alternative approach, a firm that receives client money should: (1)(a) pay any money to or on behalf of clients out of its own account; and (b) perform a reconciliation of records and accounts required under CASS 7.6.2R (Records and accounts), SYSC 4.1.1R and SYSC 6.1.1R, adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day; or (2) pay it out in accordance with the rule regarding the discharge of a firm s fiduciary duty to the client (see CASS R) G A firm that adopts the alternative approach may: (1) receive all client money into its own bank account; (2) choose to operate the alternative approach for some types of business (for example, overseas equity transactions) and operate the Page 19

160 normal approach for other types of business (for example, contingent liability investments) if the firm can demonstrate that its systems and controls are adequate (see CASS R); and (3) use an historic average to account for uncleared cheques (see paragraph 4 of CASS 7 Annex 1G) G Pursuant to the MiFID client money segregation requirements a firm should ensure that any money other than client money deposited in a client bank account is promptly paid out of that account unless it is a minimum sum required to open the account, or to keep it open R If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank account money of its own, and that money will then become client money for the purposes of this chapter. 40. Section 7.5 deals with transfers of client money to third parties. Section 7.6 (records, accounts and reconciliations) reproduces the substance of article 16 (1)(a), (b) and (c) of the Implementing Directive. It also introduces, in a curiously indirect way, the annex to CASS G deals with internal reconciliations of client money balances and 7.6.6G (3) provides: The standard method of internal client money reconciliation sets out a method of reconciliation of client money balances that the FSA believes should be one of the steps that a firm takes when carrying out internal reconciliations of client money. The first set of italics sends the reader to the glossary, which defines the phrase by reference to CASS 7 Annex 1G. The provisions of the annex are summarised, so far as relevant, in paras 63 and 64 below. 41. Section 7.7 (Statutory trust) is of central importance in this appeal. It must be set out in full: 7.7.1G Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). This section creates a fiduciary Page 20

161 relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust R A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms: (1) for the purposes of and on the terms of the client money rules and the client money (MiFID business) distribution rules; (2) subject to (3) [it is common ground that this is an error for (4)], for the clients (other than clients which are insurance undertakings when acting as such with respect of client money received in the course of insurance mediation activity and that was opted in to this chapter) for whom that money is held, according to their respective interests in it; (3) after all valid claims in (2) have been met, for clients which are insurance undertakings with respect of client money received in the course of insurance mediation activity according to their respective interests in it; (4) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and (5) after all valid claims and costs under (2) to (4) have been met, for the firm itself. 42. Section 7.8 requires the trust affecting client money to be notified to and acknowledged by banks and other intermediaries. 43. Section 7.9 (Client money distribution) is also of central importance to must be set out in full: 7.9.1R This section (the client money (MiFID business) distribution rules) applies to a firm that holds client money which is Page 21

162 subject to the client money rules when a primary pooling event or a secondary pooling event occurs G The client money (MiFID business) distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money G A firm can hold client money in either a general client bank account, a designated client bank account or a designated client fund account. A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general. A firm holds client money in designated client bank accounts or designated client fund accounts for those clients that requested their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it. If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client s entitlements, the available funds will be distributed in accordance with the client money (MiFID business) distribution rules R A primary pooling event occurs: (1) on the failure of the firm; (2) on the vesting of assets in a trustee in accordance with an assets requirement imposed under section 48(1)(b) of the Act; (3) on the coming into force of a requirement for all client money held by the firm; or (4) when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS R (Notification requirements), that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event. Page 22

163 7.9.5R CASS 7.9.4R (4) does not apply so long as: (1) the firm is taking steps, in consultation with the FSA, to establish those records; and (2) there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period R If a primary pooling event occurs: (1) client money held in each client money account of the firm is treated as pooled; and (2) the firm must distribute that client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R R (1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, the credit must be offset against the debit reducing the individual client balance for that client. (2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, the credit must be offset against the debit reducing client equity balance for that client G A client s main claim is for the return of client money held in a client bank account. A client may be able to claim for any shortfall against money held in a firm s own account. For that claim, the client will be an unsecured creditor of the firm. 44. Section 7.9 goes on to deal with client money received after a primary pooling event, and mixed remittances ( to ). It then deals with secondary pooling events, defined in the glossary by reference to R: A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred under Page 23

164 CASS 7.4.1R(1) to CASS 7.4.1R(3) (depositing client money) or CASS 7.5.2R (Transfer of client money to a third party) R provides that if both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event are to apply. 45. In this case there was a secondary pooling event ( SPE ), that is the failure of Lehman Brothers Bankhaus AG, mentioned in para 6 of the judgment of Briggs J and quoted in para 27 above, as well as a primary pooling event ( PPE ), that is the failure of LBIE. Mr Zacaroli relied on the provisions as to the consequences of SPEs (7.9.18G to R as regards any bank failure) as reinforcing his submission that losses on segregated and non-segregated funds are in general intended to lie where they fall, and to be shared rateably between those on whom they fall (this is an argument on the correct construction of CASS 7 which does not of course depend on the fact of the failure of Bankhaus). The correct approach to construction of CASS This appeal turns on the correct construction, in context, and against the background of the general law of trusts, of a small number of the provisions set out or summarised above. The crucial provisions are 7.7.2R and 7.9.6R, set out above in bold type. I have felt obliged to set out a large number of much more peripheral provisions because the text of CASS 7 has been subjected, both in the courts below and in this court, to a detailed analysis in which small verbal points (possibly an indication of no more than imperfect drafting) have been put forward and relied on as significant. 47. That is not intended as a complaint. The correct construction of CASS 7 gives rise to real difficulties. The modern approach of the court to construing commercial or regulatory documents is to prefer a purposive to a literal approach. That approach is reinforced by the FSA Handbook, in which GEN 2.2.1R provides, Every provision in the Handbook must be interpreted in the light of its purpose. But in this case any attempt to adopt a purposive approach runs almost immediately into difficulties. It is clear that the Directives intended to achieve a high level of protection of clients money, and that the prompt and scrupulous segregation of clients money, confirmed by regular internal reconciliations and monitored by the national regulatory authority, was to be the means of achieving that end. Equally it is clear that CASS 7 was intended to transpose the Directives into national law, and in doing so to make use of a basic concept of English law, the trust (Lord Hope has in his judgment addressed the application of CASS 7 where the law of Scotland applies). It is not now contended that the use of the trust Page 24

165 concept involves gold-plating. Whatever the position may be in other member states, under United Kingdom insolvency law mere segregation of clients money, without the support of an effective trust, would not give adequate protection in the event of a firm s failure. 48. So far, so good. But neither in the Directives nor in CASS 7 is there any indication of what is to happen if the organisational requirements are not complied with, and clients money is not segregated as it should be. Both the Directives and CASS 7 assume compliance and do not address the possibility of any significant degree of non-compliance, let alone non-compliance on what Briggs J referred to as a truly spectacular scale. In the Court of Appeal Arden LJ (para 63) instanced R as an example of a provision that contemplates non-compliance. It is one of three provisions (7.6.13R, R and R) which deal with the resolution of reconciliation discrepancies. These routine rules, which contemplate internal reconciliations operating effectively, cannot, with respect, be taken as negating the rules general assumption of compliance. On the contrary, their relatively trivial nature seems to me to underline a general assumption of compliance with organisational requirements that permeates CASS In these circumstances, with very large sums of money at stake, it is inevitable that the text of CASS 7 should have been subject to very close analysis. Although the distinction between R rules and G guidance is important for regulatory purposes, it is common ground that for the purposes of construction provisions which contain guidance, as well as rules, should be taken into account. Summary of assumed facts 50. The judgment of Briggs J contains quite a full account of LBIE s organisation and operating methods, partly in paras 1 to 45 of the judgment and partly in the SAF reproduced (except for its description of the claimants) in para 49. For present purposes a shorter summary is sufficient. 51. LBIE s business was organised in three segments: capital markets, investment banking and investment management. It provided a wide range of financial services to clients (including governments, trading corporations and wealthy individuals), and also traded on its own account (proprietary trading). It regularly and on a daily basis handled money in more than 50 currencies on behalf of more than 1,500 clients in different time zones. In order to cope with this volume of varied business it adopted the alternative approach (see paras 38 and 39 above) for the segregation of clients money. As recorded in para 2.11 of the SAF: Page 25

166 Client money would be paid directly into and out of LBIE s own bank accounts (or an affiliate s bank accounts) and LBIE would segregate client money by making a single daily reconciling payment to (or withdrawal from) bank accounts used exclusively by LBIE in order to segregate client money. The amount of any such payment would be calculated by LBIE each business day morning based on data as at close of business on the previous business day. The client money segregated by LBIE would then be adjusted accordingly later that day. 52. In calculating the amounts which it had to segregate as clients money, LBIE generally did so by reference to a range of components, which varied according to the type of financial services undertaken for a particular client, and the terms of the contract with that client. Under some contracts LBIE expressly agreed to provide client money protection. Under others LBIE sought to rely on the total title collateral transfer exemption contained in CASS 7.2 (SAF para 2.6). 53. Clients money was received by LBIE, or was recognised as clients money by LBIE, in three different ways: payments from clients; payments from third parties; and appropriations by LBIE of its own money by segregating it in a clients money account in order to satisfy a pecuniary obligation such as a manufactured dividend on a stock lending transaction (SAF paras 2.18 and 2.19). 54. LBIE had more than 700 different bank accounts, falling broadly into three categories: (1) accounts used exclusively for clients money, referred to as core client [money] bank accounts ; (2) an intermediate category of accounts (numbering more than 300) referred to as non-core client money bank accounts ; and (3) house accounts (numbering over 440) containing money of which LBIE regarded itself (in some cases, on the assumed facts, wrongly) as the beneficial owner (SAF 2.20; the word money does not occur in the actual designation in but it does occur elsewhere, for instance in the next line of and in 2.26). In addition, clients money was held in client transaction accounts, that is accounts held in the name of LBIE in a fiduciary capacity, with about ten different clearing houses and brokers. LBIE also had house transaction accounts for the purpose of its proprietary trading. Sometimes a single transaction account was used for both clients money and proprietary trading (SAF paras 2.42 to 2.49). 55. LBIE had a liquidity management process described in SAF paras 2.21 to Its general object was to ensure, by projections of funding needs and appropriate transfers, that LBIE had sufficient liquidity, but not a large surplus of funds, for its trading operations. Daily transfers were made between LBIE and LBHI so as to achieve this. In the months leading up to its failure, LBIE was a net Page 26

167 debtor of LBHI, so that the effect of transfers from LBIE to LBHI was to reduce the intra-group indebtedness. 56. SAF 2.26 describes how client money was dealt with as part of that process: All of LBIE s bank accounts were subject to the liquidity management process save that, in relation to LBIE s core client money bank accounts, surplus funds would only be withdrawn from these accounts where LBIE s reconciliation and segregation calculation permitted LBIE to reduce the amount of money segregated by it. Prior to the Time of Appointment therefore, client money first received into one of LBIE s bank accounts was regularly transferred to LBHI s bank account(s) each evening prior to LBIE segregating an equivalent amount the next morning. 57. As to the events immediately before LBIE was put into administration by an order made at 7.56 am on Monday 15 September 2008, the last internal reconciliation of clients funds took place on the morning of Friday 12 September 2008 by reference to data as at the close of business on Thursday 11 September. SAF para 2.26 goes on to record: Given that, it is possible that client money received into LBIE s non-core client money bank accounts or house accounts between [close of business] on 11 September 2008 and close of business on 12 September 2008 would have been passed up to LBHI as part of the liquidity management process prior to the Time of Appointment [of the Administrators]. There is a more detailed account of these events in SAF para In the judgment of Briggs J the close of business on 11 September 2008 is referred to as the Point of Last Segregation ( PLS ) and 7.56 am on 15 September 2008 is referred to as the Time of Appointment or, in the context of CASS 7, the PPE. 58. The appointment of the administrators on 15 September 2008 may be seen as a supervening event which made it impossible for LBIE to perform its obligation (under the alternative approach) to segregate clients money within one business day. The other failures to segregate seem to have started long before and to have continued over a long period. They are described as follows (by way of example) in SAF para 2.52: Page 27

168 (1) LBIE did not segregate any money in relation to trading in any transactions, including margined transactions, carried out in respect of Affiliates trading on their own account. The amounts claimed by the Affiliates in connection with this exceed USD3 billion. (2) LBIE did not segregate any money in connection with certain complex arrangements that it had for the trading of various positions with its Affiliates, in connection with which amounts would fall due and payable as between LBIE and those Affiliates but would be posted to the relevant intercompany ledger account rather than always immediately paid. [A footnote refers to a separate application relating to the RASCALS process.] (3) LBIE often entered into agreements with its clients under which LBIE understood that client money protection would not be afforded to various types of money held by it for those clients. Where this was the case, LBIE did not generally segregate money on behalf of such clients. A number of clients with agreements of these types seek to argue that the particular language contained in their agreements was not effective to exclude client money protection, at least not in its entirety. Similarly where clients entered into a number of agreements with LBIE which provided for differing levels of client money protection, those clients may seek to argue that amounts which were held by LBIE for them at the Time of Appointment were held pursuant to an agreement which provided for some client money protection as opposed to another which did not. (4) LBIE did not generally segregate as client money certain amounts relating to options transactions with its clients. This was the case for all clients, irrespective of whether they had in place title transfer arrangements with LBIE. Whilst LBIE segregated premiums received for sold options and variation margin on certain options and gains on options closed-out, it did not otherwise generally segregate for unrealised gains on open options positions. As at 12 September 2008, the approximate aggregate value of unrealised gains (not deducting unrealised losses) arising from options transactions which had not been segregated was USD146m. (5) LBIE did not segregate any money in respect of OTC derivatives because all such money was regarded by LBIE as being held pursuant to total title transfers in accordance with CASS 7.2.3R. Page 28

169 (6) From time to time operational errors occurred which led to a failure by LBIE to segregate an appropriate amount for a client. There were also some potential instances of over-segregation. 59. The particular facts relevant to CRC are summarised in SAF para 6: (1) CRC was a prime brokerage client of LBIE. (2) CRC is a wholly Unsegregated Client for whom no client money was segregated by LBIE at the Time of Appointment. (3) LBIE should have segregated as client money for CRC sums including USD52m in connection with FX transactions and a cash balance of approximately USD24m in various currencies on other accounts. 60. Claren Road Credit Master Fund Ltd (which was a party to the original application but is not represented on this appeal) is an example of a client for whom money was received on 12 September 2008 but whose money was not segregated because LBIE went into administration. Details of its interest are given in SAF para 7. The first issue 61. The first issue is the time at which the statutory trust arises. In the case of money received from a client or from a third party, the two competing answers are time of receipt and time of segregation. In the case of satisfaction of a monetary obligation of the firm to a client (the fourth issue in the Court of Appeal) it is now common ground that the trust arises on the appropriation of funds in satisfaction of the obligation, normally by a payment into a segregated client account. 62. On the first issue Briggs J and the Court of Appeal were in agreement that the statutory trust arises on receipt of the money; and this court, I understand, unanimously agrees that they were right. In the circumstances I can deal with the point fairly shortly, and mainly by reference to the judge s reasons. Briggs J began his discussion with the observation (para 138), with which I agree, Page 29

170 There is much to be said for the proposition, advanced by Mr Milligan in reply, that the question when the statutory trust attaches to client money is really a short point of construction, unambiguously answered by the opening words of CASS 7.7.2R: A firm receives and holds client money as trustee.... In paras 139 and 140 he summarised the contrary arguments (put before him not by Mr Zacaroli but by counsel for a representative unsecured non-client money creditor and by counsel for LBHI). In paras 141 to 165 he gave his reasons for rejecting those arguments. 63. I would readily adopt those reasons, expressed in the judge s words, as my own, but I can summarise them, with some loss of finesse, as follows. (1) Where money is received from a client, or from a third party on behalf of a client, it would be unnatural, and contrary to the primary purpose of client protection, for the money to cease to be the client s property on receipt, and for it (or its substitute) to become his property again on segregation. It would also be contrary to the natural meaning of the comprehensive language of 7.7.2R (paras ). (2) Segregation without a trust would not achieve MiFID s objective. Under the alternative approach an immediate trust of identifiable client money does provide protection, though mixed funds are subject to a variety of risks (para 148). (3) The absence of express restrictions, under the alternative approach, on use of clients money while held in a house account does not mean that the firm is free to use it for its own purposes. Its obligation is to segregate it promptly, and both section 7.3 of CASS and the general law of trusts would prevent use of clients money for proprietary purposes. There are at least two methods, one contemplated by R, of ensuring the protection of clients money temporarily held in a house account (paras ). (4) The most formidable argument in favour of segregation (premised on the view that the provision of the distribution rules in 7.9.6R(1) applies only to segregated funds) is that there is under the alternative approach potentially a black hole into which clients money may vanish, so as not to be caught by the distribution rules. This is a point of substance, but it does not outweigh the opposing arguments. To allow a limited defect of the alternative approach to dictate the interpretation of the essential provisions of section 7.2 would be to let the tail wag the dog. Page 30

171 64. In the Court of Appeal both Lord Neuberger MR (paras ) and Arden LJ (paras ) agreed with the reasoning of Briggs J, although each added some further particular reasons. 65. In his able submissions on behalf of GLG Mr Zacaroli sought to draw a fundamental distinction between the normal approach and the alternative approach. He submitted that the latter approach is a complete contrast, under which the firm is expressly permitted to pay money into house accounts in which it would swill around with all the money in the firm s house accounts. This point is largely covered by the judge s reasoning as briefly summarised in para 63(3) above. I would add only that the alternative method is available not for the convenience of the firm, but as a better means of securing client protection (the judge s second point in para 104 of his judgment). Both methods are intended to achieve a high degree of client protection, either by immediate segregation or by very prompt segregation. Moreover client money held temporarily in a house account does not, in the eyes of trust law, swill around but sinks to the bottom in the sense that when the firm is using money for its own purposes it is treated as withdrawing its own money from a mixed fund before it touches trust money (the point made by the judge in para 153 of his judgment). I would therefore dismiss GLG s appeal on the first issue. The second and third issues before Briggs J 66. The second and third issues are stated in the agreed statement of facts and issues in these terms: (2) Do the primary pooling arrangements apply to client money in house accounts? (3) Is participation in the pool dependent on actual segregation? They were formulated in similar, but not identical terms in the Court of Appeal (para 6 of Arden LJ s judgment). These are the issues on which the Court of Appeal unanimously differed from the judge. I shall try to summarise the main lines of reasoning in the courts below, although (again) my summary will not do justice to many of the finer points in the judgments. 67. Briggs J covered what is now the second issue (his third issue, rather differently formulated) at paras 166 to 198. Because the issue as to the constitution of the client money pool ( CMP ) was differently formulated, many of the arguments which the judge had to consider have not been pursued on appeal. With Page 31

172 hindsight derived from the hard toil of the appeal process I find it a little surprising that the judge concentrated so much on the language of 7.9.6R(1), to the exclusion of The statutory trust in received only an indirect mention in para 195: There is in any event a persuasive symmetry between that part of CASS 7 which requires the identification and segregation of client money by a firm while in business, and the distribution rules which, on that interpretation, require the money thus segregated to be promptly distributed to the clients entitled to it upon the firm s failure. The judge concluded on this issue (para 197): (i) The CMP is constituted as at the PPE only by client money in segregated accounts. (ii) Client money outside the firm s segregated accounts does not form part of the CMP. (iii) The identification of client money (if any) outside the firm s segregated accounts depends upon the established principles by which a beneficiary must trace his property in order to pursue a proprietary claim in relation to it [with references to five well-known cases]. 68. As to the third issue, the basis of sharing the CMP, Briggs J approached that as a contest between what he called the contributions theory and the claims theory. This corresponds closely to the contest as to whether in CASS 7 client money entitlement refers to contractual or proprietary entitlement. It is to be noted that however the issue is formulated it arises as a problem, except in relation to the last business day, only in the event of non-compliance with CASS 7. The judge saw the contest as a difficult question with large consequences, which is undoubtedly correct. He observed (para 228): Unhappily, CASS 7 provides no clear guidance on this question. This is probably because the draftsman working in the utopian world of full compliance by the firm with the client money rules before its failure, assumed that there would be no substantial difference between the amount which should have been segregated and the amount which was actually segregated for any particular client. The only differences would arise from dealings with client money during Page 32

173 the short period between the PLS and the PPE, and then only in relation to a firm using the alternative approach. In para 234 the judge came back to the point that the Directives contemplate that the protection of clients money will be achieved by compliance with the Directives organisational requirements. In paras 238 and 239 he analysed the effect of 7.7.2R, in conjunction with other provisions, in imposing the statutory trust for the clients for whom that money is held, according to their respective interests in it. 69. Para 241 in effect sets out the case for the contributions theory at its highest, and then notes that there are counter-arguments: The result is in my judgment that the MiFID Directives, the general law and an analysis of the proprietary rights in the segregated accounts prior to pooling, all support the contributions theory as against the claims theory. There remains nonetheless the question whether, as submitted by (and for) the un-segregated clients, the language of the distribution machinery contained in CASS 7.9.6R, 7R and 9R requires the application of a claims rather than contributions basis of calculation as a matter of interpretation. For that purpose, there is no escape from a painstaking analysis of the meaning and purpose of those three paragraphs, and in particular paragraph 7.9.7R. The counter-arguments are summarised in seven sub-paragraphs in para 242, described in the next paragraph as constituting a formidable textual argument. But the judge discerned weaknesses in it. First, the expression client money entitlement in CASS 7 does not have a single fixed meaning. Second, the draftsman could not have contemplated a disparity between the results of the two methods because his aim was (para 246) to construct a scheme of obligations with which he expected firms to comply, rather than flout. Moreover (para 250) it is no part of the distribution rules to confer upon clients whose money was, in breach of the client money rules, not contributed to the segregated accounts from which the CMP is constituted, a beneficial interest in that fund which did not exist immediately prior to the PPE. The judge then embarked on what is indeed a painstaking examination of 7.9.6R(2), 7.9.7R and 7.9.9R, which took him into the purposes and structure of the annex. He concluded (para 275): My conclusion on this issue therefore is that the basis for sharing in the CMP is the amount which the firm actually segregated for each client, as revealed by the last internal reconciliation account carried Page 33

174 out by the firm before the PPE, and in LBIE s case (because it used the alternative approach) by reference to the PLS, subject to certain adjustments necessitated by CASS 7.9.7R, and by subsequent events, to which I will return later in this judgment. The second and third issues in the Court of Appeal 70. In the Court of Appeal Arden LJ covered the second issue at paras 108 to 142 of her judgment, with her conclusions beginning at para 124. She saw client money account (an undefined expression) as having a wide meaning. She thought it significant that the statutory trust was a single trust, that client money entitlement in 7.9.6R(2) naturally referred to a contractual entitlement, and that 7.9.3G envisaged a pooling of all the client money, in every type of client money account (para 127). She saw the contributions theory as producing unfair results (paras 130 and 131). She rejected the argument that the claims theory involved any interference with the rights, prior to the PPE, of fully-segregated clients (para 134). Similarly she discounted the judge s symmetry (para 195 of his judgment, quoted in para 67 above) as a distraction (para 137). She concluded that there was to be a pooling of all client money in segregated accounts and house accounts (para 139), and that there should be a final reconciliation covering events down to the PPE (paras ). 71. Lord Neuberger MR addressed the second issue at paras 204 to 224. He could get only limited textual assistance, though he considered numerous detailed points (paras 205 to 215). He saw some force in the submission that at least on a primary pooling event, the clients of the firm are in it together, and client money is pooled and paid out to all clients on a pro rata basis, and that the claims theory was fairer in avoiding a degree of randomness (paras 217 and 218). He also attached some weight to the notion that the statutory trust was a single trust, and to the Directive s aim of providing a single and consistent level of protection (paras 221 and 222). So Lord Neuberger reached the same agreement as Arden LJ on the second issue, and Sir Mark Waller agreed with both of them. Lord Neuberger does not seem to have commented on Lady Arden s view that a further, final reconciliation was appropriate, and the order of the Court of Appeal as perfected does not refer to this point. But Mr Miles in his written case (para 182) and his oral submissions (Day 4, page 96) relied on Sir Mark Waller s general agreement with Arden LJ on the topic of pooling. 72. Arden LJ addressed the third issue at paras 143 to 163, with her conclusions beginning at para 154. She repeated that client money entitlement referred to contractual entitlement, even if it meant distributing funds to clients with no proprietary claim. It was open to the FSA, she stated, to treat the failure of the firm as a common misfortune in which those who had claims to the recovery of client Page 34

175 money should share without distinction (para 154). She noted that even under the contributions theory, adjustments have to be made, and considered that the judge s reference to a glitch (in para 265 of his judgment) understated the problem (para 157 of the judgment of Arden LJ). Referring to the words for the clients... for whom that money is held, according to their respective interests in it in 7.7.2R (3) Arden LJ stated (para 160): While the firm is a going concern those interests are the several interests of the clients but on a PPE a pooling occurs so that on any view those interests are varied. Accordingly as from the happening of a PPE, the expression their respective interests must mean their respective interests under CASS 7.9.6R. So Arden LJ s conclusion was in favour of the claims theory. 73. So was that of Lord Neuberger MR (paras ). He regarded the objections to the contributions theory (set out in para 242 of the judge s judgment) as not merely formidable but also decisive. He thought that client money entitlement did have a consistent meaning if the claims theory was adopted; it was only if the contributions theory was adopted that inconsistency occurred. Again, Sir Mark Waller agreed with Lord Neuberger and Arden LJ. 74. The intricate textual arguments outlined above (and it is merely an outline) have now been debated between highly skilled counsel for a total of 20 days. Many of them seem to be the result of drafting imperfections in CASS 7. As was pointed out below, there is no definition of the expression client money account, although the glossary (which is the size of a small dictionary) does contain definitions of client bank account (as a current or deposit account at a bank, in the name of the firm, which holds the money of one or more clients ) and client transaction account (explained in G). 75. It is, I accept, impossible to avoid the most important of the textual arguments, particularly the formidable argument (paras 242 and 243 of the judgment of Briggs J) which ultimately persuaded Lord Neuberger, and also influenced Arden LJ s conclusions (paras 154 to 160). I shall return to those arguments. But in my view the resolution of the second and third questions (which are closely bound together) depends ultimately on the general scheme and structure of the regulatory framework in CASS 7, and on seeing (in general terms) how segregation of clients money worked in practice, not merely on the catastrophic failure of the firm on the PPE, but from business day to business day during the firm s trading operations. Page 35

176 The nature of the statutory trust 76. In the search for the essential scheme and structure of CASS 7 the outstanding feature is the statutory trust. In line with the clear conclusion reached on the first issue, the effect of CASS 7 is that under the alternative approach, as well as under the normal approach, a firm receives and holds clients money as a trustee, with beneficial ownership remaining in the clients. The trust in 7.7.2R is (1) for the purposes of and on the terms of the client money rules and the client money (MiFID business) distribution rules; (2) subject to [(4) - costs of distribution on failure] for the clients [subject to an irrelevant exception] for whom that money is held, according to their respective interests in it. The client money rules are defined in the glossary as CASS 7.1 to 7.8, and the client money (MiFID business) distribution rules as CASS 7.9. The latter rules apply only in what was (until shortly before LBIE s failure) no doubt regarded as a remote contingency, that is the failure of the firm or some other event amounting to a PPE. Unless and until such an untoward event happens, the purposes of the statutory trust are those in CASS 7.1 to This point needs to be made since Mr Miles, for understandable reasons, referred to the statutory trust as a purpose trust and placed emphasis on the purposes of the client money distribution rules in CASS 7.9, and especially 7.9.6R. Those rules came into operation on the failure of the firm on 15 September Until then clients money had been held, no doubt in some cases for years, in client money bank accounts (some general and some designated) for all the purposes of CASS 7.4, 7.5, 7.6 and that is segregation, transfer to third parties, record keeping and internal reconciliation, and protection (by notice to banks) of client money bank accounts. Those purposes were not ends in themselves (as in a trust for charitable purposes). They were purposes directed to the protection and management of clients money in the beneficial ownership of clients who were identified beneficiaries of the trust, being (as 7.7.2R(2) puts it) those for whom that money is held, according to their respective interests in it. 78. The biggest objection to the claims theory of interpreting 7.9.6R is that it involves, on the assumed facts of this case, a cataclysmic shift of beneficial interest on the PPE, to the detriment of those clients who must have supposed that their funds were safely segregated in accordance with CASS 7.1 to 7.8. That shift (or bifurcation, to use a term which counsel used a great deal in argument) is in Page 36

177 striking contrast to the persuasive symmetry that Briggs J (para 195 of his judgment, para 67 above) found in the contributions method. It is a far more extraordinary bouleversement than the relatively trivial bifurcation involved in segregation of clients money being deferred, under the alternative approach, until the next business day after its receipt. In his written case (para 34) Mr Zacaroli suggested that it would amount to the segregated clients funds being used as a strange form of compensation fund for disappointed clients whose funds had not been segregated. 79. The Court of Appeal was aware of this difficulty. Arden LJ recognised (para 134) that the court should not of course interfere with property rights but dismissed the difficulty on the ground that dealings between the firm and its clients take place on the basis of CASS 7, and thus pooling is implicit in their dealings, followed by a reference to 7.9.3G. It is true that money in a general client account is pooled, and is at a risk that it will be shared rateably between the beneficial owners in the event of a SPE (such as the failure of a bank holding clients money) occurring without a PPE. But the notion that clients must be taken to have implicitly accepted the risk of discovering, on a PPE, that their carefullysegregated funds must be shared with non-segregated clients (including Lehman Brothers affiliates) seems, with respect, quite unrealistic. 80. An associated point on the judgments in the Court of Appeal is the notion that all the clients of LBIE were victims of a common misfortune or disaster. Arden LJ referred to this (para 125 and, for what she called the happenstance point, para 131). Arden LJ did not accept Mr Zacaroli s submission that the correct analysis was not the common misfortune of the firm s failure, but the separate misfortune (suffered by some clients but not by others) of LBIE s assumed failure, on a massive scale, to comply with its obligations under CASS 7.4. Both Arden LJ (para 131) and Lord Neuberger (para 218) seem to have accepted the submission of Mr Mabb QC (appearing for the FSA, the statutory regulator whose share of responsibility for the misfortunes of some or all of LBIE s clients is not an issue in these proceedings) that the non-segregation was happenstance and that equal treatment seems fairer than randomness. 81. With great respect to the Court of Appeal, I regard that approach as inappropriate. The court has to give directions to the administrators on the basis of the assumed facts set out in the SAF. Those assumed facts are stated for the most part at a high level of generality, and with an almost clinical detachment from what the judge referred to as LBIE s shocking underperformance. We simply do not know how it came about that so much clients money was paid into house accounts when it should have been segregated. In particular, apart from the terse statements in SAF 2.52 (para 58 above) we do not know the circumstances in which LBIE came to overlook, or decide not to apply G (Affiliated companies) in dealing with Lehman Brothers affiliates (SAF 2.52(1) and (2)); or the circumstances in Page 37

178 which terms were negotiated with clients leaving room for argument as to whether client money protection was wholly or partly excluded (SAF 2.52(3)). There is no basis, in my respectful opinion, for deciding that one scheme of distribution would be fairer than another. Our task is to construe CASS 7, and then apply it to the assumed facts. In construing CASS 7 we have to look at its essential scheme and structure. Beyond that a purposive approach gives little assistance, since it is plain (as already noted) that neither the Directives nor CASS 7 contemplate noncompliance with regulatory requirements (in the judge s words) on a truly spectacular scale. 82. Both Lord Neuberger and Arden LJ gave some weight to the statutory trust being a single trust, without much explanation of what that meant or why they saw it as significant. The trust is declared in simple terms as affecting client money, but the detailed guidance, especially that in 7.9.3G, shows that some client money will be pooled in general client bank accounts, while other client money will be held separately in designated client bank accounts. Some but not all clients will be entitled to interest on their client money (7.2.14R). A bank holding client money may fail (as Bankhaus did) and on a SPE any loss will fall rateably only on those clients whose money was deposited with that bank - not on all clients. So the single trust argument does not provide much support for the claims theory. The majority judgments in this court 83. Lord Dyson disagrees with the views set out in para 81 above. In his view (para 159) a purposive interpretation clearly supports the claims basis for participation. That is because the Directives overriding purpose is to safeguard the assets of all clients and to provide all clients with a high degree of protection (his emphasis). This purpose is to be achieved, in his view, by a solution which means that no client of LBIE is provided with a high degree of protection, even those whose funds were (at all times down to the PPE) meticulously segregated and accounted for in accordance with CASS 7. With the greatest possible respect, I simply cannot follow this argument. 84. I consider the majority view also gives insufficient weight to the fact that, although CASS 7 provides a detailed code, that code is erected on the foundation of the general law of trusts. Lord Collins refers (para 186) to Professor Gower s Review of Investor Protection (1984), noting that under English law segregation of funds provides a client with insufficient protection unless it is backed by the client s continuing beneficial ownership. So (as already noted) CASS 7 was not gold-plating the Directives. Page 38

179 85. But it is equally clear that a trust without segregation is a very precarious form of protection because of the risk or rather, in this context, the strong probability that the element of trust property in unsegregated funds will rapidly become untraceable. Immediately before the PPE, many of the non-segregated clients probably the great majority of them had no identifiable trust property held in trust for them. The funds of the segregated clients, by contrast, belonged in equity, immediately before the PPE, to the respective clients for whom they had been segregated. Lord Dyson (para 144) and the others in the majority evidently regard it as realistic to suppose that those segregated clients accepted the risk of having the bulk of their beneficial interests divested in order to compensate other non-segregated clients who, immediately before the PPE, had no beneficial interest in any identifiable trust property (and of whom, and of whose affairs, the segregated clients knew nothing). The majority s decision makes investment banking more of a lottery than even its fiercest critics have supposed. Internal client money reconciliation (the Annex) 86. Any trustee which holds large sums of money in trust for clients must have in place appropriate procedures, keep accurate records, and regularly reconcile its balances. For a financial services firm like LBIE, which offered a wide variety of services to a large number of clients, these obligations were of particular importance, and CASS 7.6, together with the Annex, laid down detailed and fairly complicated rules. These were needed because clients did not leave their money inactive. They deployed it in trading activities in which their positions might change from day to day. So the daily internal reconciliation had to cover clients money held in client transaction accounts (SAF 2.12 and 2.42 to 2.49) or committed to futures or other margin transactions (SAF 2.28 to 2.39). 87. These complications are reflected in the Annex. I gratefully adopt the judge s summary (paras 256 to 258): 256 The standard method of client money reconciliation is set out in [the Annex]. It requires a firm on each business day to identify its client money requirement (as defined by paragraph 6) and to ensure that its client money resource is at least equal to the client money requirement The firm s client money requirement is (in the first of two alternative formulations in paragraph 6) the aggregate of all individual client balances, excluding negative client balances and client equity balances, together with the total margined transaction requirement, which is (as appears from paragraph 14) the aggregate Page 39

180 of all positive client equity balances, subject to certain deductions which do not matter for present purposes Paragraphs 12, 18 and 19 of [the Annex] give the firm certain discretions as to how to carry out these calculations. Paragraph 12 gives the firm a discretion to deduct fees and other expenses due and payable by the client to the firm. Paragraph 18 (further explained by paragraph 19) gives the firm a discretion to make an offset between a positive individual client balance and a negative client equity balance, or vice versa, so as to reduce either the individual client balance or the client equity balance. Client equity balance is defined in the glossary as the amount which a firm would be liable (ignoring any non-cash collateral held) to pay to a client (or the client to the firm) in respect of his margined transactions if each of his open positions was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and his account closed. That explains why the balance can be either positive or negative. 88. Briggs J went on (paras 258 to 261) to a detailed consideration of R, under which it is mandatory, after a PPE, to make the paragraph 18 offset which has until then been discretionary. That point is best considered as part of the discussion of 7.9.6R and 7.9.7R, which follows. The third issue: the effect of primary pooling 89. Mr Miles arranged his written and oral submissions so as to deal with the third issue (how is the CMP to be distributed?) before the second issue (what is to go into the CMP?). There are advantages in that approach. The second issue, if understood (as it must be) in a way that does not pre-empt the third issue, becomes a relatively narrow issue limited to any money which was held in house accounts at the PPE and was identifiable, under the general law of trusts, as clients money. Mr Zacaroli submitted that if he lost on the second issue he could still win on the third, and (he might have added) the third issue is almost certainly of much greater importance in financial terms, both to his client and to the other claimants. I shall therefore adopt Mr Miles s approach and consider the third issue before the second issue. 90. It is worth repeating the crucial provisions which come into operation on a PPE: 7.9.6R If a primary pooling event occurs: Page 40

181 (1) client money held in each client money account of the firm is treated as pooled; and (2) the firm must distribute that client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R R (1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, the credit must be offset against the debit reducing the individual client balance for that client. (2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, the credit must be offset against the debit reducing client equity balance for that client. 91. At the beginning of his discussion of the second issue Briggs J observed (para 166): The (perhaps old fashioned) principle of construction that words are there for a purpose suggests that the phraseology used was designed to achieve at least the following two purposes. The first is that it was not the intention of the draftsman to capture all client money held by the firm, but only client money held in each client money account of the firm. Secondly, it was not the intention to capture all money held in each client money account of the firm, but only client money held in such accounts. 92. I agree that that is the right starting point, not only for the second issue, but also (as they are so closely connected) for the third issue. The expression client money account is not defined in the glossary, but it naturally refers to (i) every client bank account (which is a defined term and covers every general client bank account, every designated client bank account and every designated client fund account of the firm, those being the different forms of account mentioned in 7.9.3G) and (ii) every client transaction account (which is a defined term and is explained in G). These are the accounts affected by the internal reconciliation obligation, as appears from the unnumbered preamble to the Annex. Arden LJ considered (para 136) that the expression client money account must Page 41

182 have been deliberately chosen as being wider than client bank accounts and client transaction accounts but I do not understand her reasoning and I respectfully differ from her conclusion. Lord Neuberger considered the textual arguments to be much more evenly balanced (paras 205 to 215) and he seems ultimately to have decided the point by a general appeal to fairness, with which I have already expressed my respectful disagreement. 93. For these reasons I approach the third issue on the provisional basis, at least, that the CMP - the distributable pool - consists of the aggregate of the segregated funds holding clients money immediately before the PPE. Those funds are assumed to have been subject to internal reconciliation on every business day, following the detailed procedure in the Annex, so that the client money resource is at least equal to the client money requirement (Annex, paras 2 and 6). 94. That pool is to be distributed in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R. As the judge observed (para 251), had this provision stopped at the comma after 7.7.2R there would have been no doubt but that the clients entitled to participate in the distribution were those identified in the last reconciliation. They were under R (2) the clients... for whom that money is held and it was to be distributed according to their respective interests in it. In the course of his excellent submission Mr Miles urged that each client in 7.9.6R must be taken as meaning what it says. But the words must be read in context. When read in context, they mean each client for whom client money is held. In In re Global Trader Europe Ltd [2009] EWHC 602 (Ch) [2009] 2 BCLC 18, para 99, Sir Andrew Park reached the same conclusion as Briggs J on this point. 95. The second part of 7.9.6R(2) begins with the words so that. Those words are apt to introduce the natural consequences of what has gone before, rather than to herald an abrupt change. The reference to a rateable distribution of the CMP indicates the possibility of a shortfall, and in practice a shortfall is almost inevitable on the failure of the firm, since in that event the costs of distributing the CMP are to be a first charge on it under 7.7.2R(4). There are also some more technical reasons which may produce a shortfall in the CMP, though any such shortfall would probably be relatively small. These are identified in paras 262 to 269 of the judge s judgment. I agree with the judge s analysis and I need not repeat it. 96. The final words of 7.9.6R(2) are calculated in accordance with CASS 7.9.7R. The judge said of this (paras 254 to 256, whose language I gratefully adopt as I cannot improve on it): Page 42

183 254.It is this concluding phrase, and its incorporation of CASS 7.9.7R, that lies at the heart of the argument of the protagonists for a claims basis of sharing in the CMP. Put another way, the case for rejecting a contribution basis rests wholly on an understanding of CASS 7.9.7R, to which I now turn The first thing to notice about CASS 7.9.7R is that it does not purport to constitute a comprehensive formula for the calculation of a client money entitlement. It merely provides for the offset of two particular types of accounting debit against two particular types of accounting credit. By subparagraph (1) a positive individual client balance is to be reduced by offsetting a negative equity balance. By subparagraph (2) a positive client equity balance is to be reduced by any negative individual client balance. It says nothing about the situation where a client has positive balances, or negative balances, of both types. It is, as Mr Zacaroli described it, a reducing mechanism. Its effect is, in the stated circumstances, to reduce what otherwise might have been identified as a client s client money entitlement, which is to serve as the basis for his rateable participation in the CMP In the case of a reasonably compliant firm, it may be assumed that the basis upon which the firm had segregated client money for each of its clients prior to the PPE would be disclosed from the last internal client money reconciliation account, upon the basis of which (for example) a firm using the alternative approach would have adjusted the amount of the segregated accounts as at the PLS. 97. The judge then continued with the passage that I have already quoted at para 90 above, and went on to comment that the option conferred by paragraph 18 of the Annex permits, but does not require, a firm to carry out precisely the same offsetting process as is made mandatory after a PPE by CASS 7.9.7R (para 258). He regarded the purpose of 7.9.7R as obscure (para 232). Arden LJ noted (para 152) that it has a limited operation, but did not go further into its purpose. Nor did Lord Neuberger (paras 189 and, in a quotation from the judge, 228). I agree with Briggs J that it is very hard to see why one point of detail in the Annex has been singled out, as it were, for particular mention in 7.9.7R. But I am in full agreement with his conclusion (para 261) that this obscure provision does not necessitate a construction, contrary to all other indications, that the CMP is to be distributed on the basis of the claims theory rather than the contributions theory. For these reasons, which are the same as those of the judge, I would allow GLG s appeal on the third issue. Page 43

184 The second issue: final reconciliation as at the PPE 98. If the first and third issues are resolved in the way set out above, the second issue is seen to be within a relatively narrow compass. It becomes focused on movements in the client money requirement as between the PLS (close of business on Thursday, 11 September 2008, the critical time for the data on which an internal reconciliation took place on Friday, 12 September) and the PPE (7.56am on Monday, 15 September). I shall refer to this period as the gap period. 99. This court has to decide the issue as a matter of principle, proceeding on the basis of assumed facts. But it may be worth pulling together the few passages in the SAF which touch on this point. SAF para 2.26 (quoted in paras 56 and 57 above) mentions the possibility that client money received into non-core client money accounts or house accounts would have been passed up to LBHI as part of the liquidity management process. SAF states that a total sum of over $45m of client money was paid to clients from house accounts during the gap period. At first instance Mr Zacaroli accepted that a client who was repaid client money during the gap period could not expect to be repaid twice (para 268 of Briggs J s judgment). SAF 2.50 does not state in terms how much client money was received during the gap period. But SAF para states that 24 house accounts regularly used for client transactions had at the PLS credit balances totalling about $162m, and that at the PPE 26 accounts had credit balances totalling about $297m. The third supplement to the SAF, para 1, adds to this that the 24 accounts mentioned in SAF were not swept to zero on 12 September 2008 (that point does not seem to have been picked up by Briggs J at para 110 of his judgment). Para 2 of the third supplement adds that on the current state of the administrator s knowledge much of the money in these accounts was probably not clients money It is not necessary, or indeed possible, to try to go much further into the incompletely stated (and in any event assumed) facts about movement of funds in the gap period. But the mere fact that there was no sweep under the liquidity management process on 12 September 2008 makes it possible that significant sums of client money are traceable, under the general law of trusts, as still held in LBIE s house accounts at the PPE In practice the second issue resolves itself into a contest between two theories. (1) One theory ( the final reconciliation theory ) is that as soon as possible after the PPE LBIE, although then under the control of the administrators, should have carried out a final reconciliation in accordance with the provisions of the Annex. Page 44

185 (2) The other theory ( the general trust law theory ) is that it was not the administrator s duty to carry out a final reconciliation, but that a similar result would be produced by clients whose money was stranded in a house account during the gap period claiming it, not under CASS 7, but under the general law of trusts. In reply to a question from Lord Clarke Mr Miles said (Day 3, page 93) that exactly the same result was produced by either route. I do not think that is quite right (though I may have misunderstood Mr Miles). Under the final reconciliation theory there would be a small alteration in the constitution of the CMP and any clients making last-minute contributions to the CMP would share rateably, and suffer rateably any inadequacy in the pool (whether from the failure of Bankhaus, or from the costs of distribution under 7.7.2R(4), or from any other cause). Under the general trust law theory they would claim the whole of their respective contributions, so far as sufficient client money could be traced and identified, and there might be some deduction for administrative costs under the principle in In re Berkeley Applegate (Investment Consultants) Ltd [1989] Ch 32. So the outcome would not be exactly the same, but it might well be similar Under the general trust law theory an unsegregated last-minute provider of client money would be left to his claim as an unsecured creditor only if and so far as his money was not traceable and identifiable in credit balances in house accounts. The guidance in 7.9.8G (set out in para 43 above) is therefore (to put it no higher) incomplete. Briggs J recorded (para 127) that before him leading counsel then appearing for the FSA roundly declared that it was wrong, and that the FSA intended to change it as soon as practicable In his judgment Briggs J considered the final reconciliation theory (though not under that name) as part of an important passage (paras 199 to 226), much of which was concerned with whether LBIE was under a duty to top up the CMP out of its own funds. He held that that would be contrary to basic principles of insolvency law, and there is no appeal on that point. He then more briefly rejected the suggestion that there was an obligation to top up the CMP with any identifiable client money in house accounts, concluding (para 224): In my judgment the lacuna is sufficiently filled by the general law, which permits those clients whose money is identifiable within house accounts, and not therefore part of the CMP, to pursue proprietary claims for its recovery, if they can surmount the evidential obstacles imposed by the need to trace. Page 45

186 It is interesting to note (para 225) that at that stage Mr Zacaroli, if correctly reported, seems to have been supporting the final reconciliation theory, or something like it In the Court of Appeal Arden LJ expressed a clear preference for the final reconciliation theory (paras 140 to 142). I have already noted that Lord Neuberger did not cover this point, and the order of the Court of Appeal leaves it in doubt whether Sir Mark Waller s general agreement with Arden LJ should be taken as covering this particular point. Before this court Mr Miles and Mr Crow have supported the final reconciliation theory with some detailed written submissions (paras 179 to 183 and 49 to 52 of their respective written cases) as well as in oral argument. They have pointed out that it avoids a bifurcated scheme and achieves a symmetrical result. Mr Zacaroli dealt with this point quite briefly in his written case (para 213) and in his oral submissions On this issue I accept the submissions of Mr Miles and Mr Crow. There was no real challenge to Mr Miles argument that there is nothing in CASS 7, or in the general law of insolvency applicable to administrators, to prevent a final internal reconciliation being carried out on the data as they were at the PPE, limited to taking account of events during the gap period (and not reopening previous reconciliations down to and including the PLS). That interpretation avoids bifurcation, achieves symmetry, and assimilates the effect of the alternative approach with that which would have occurred under the normal approach I would therefore dismiss GLG s appeal on the second issue so far as it relates to movements in clients entitlements during the gap period. But I would allow the appeal to the extent of limiting the wide language of the direction or declaration in para 5 of the Court of Appeal s order. Whatever the outcome of this appeal, the terms of the order are going to need careful consideration and drafting in order to give the administrators the clearest possible guidance As a postscript, I have not overlooked the parties submissions on two points: legislative history and the need for a timely, workable solution. As to the first, counsel have been very helpful in exploring how this area of regulatory law has evolved, but I do not think it gives the court any significant assistance in the task of construing CASS As to the need for the administrators to have a workable scheme which provides for a timely distribution, that is an aspiration which has already, sadly, perished. A straightforward, timely distribution is impossible because of LBIE s massive non-compliance with CASS 7. Because of it, there is in one sense no commercially sensible solution to the problem, and that is the bleak situation in Page 46

187 which the court has to give guidance to the administrators. But I have little doubt that the decision of the majority will lead to much more delay, uncertainty and expense than if the judge s directions had been restored. LORD CLARKE 109. I had initially intended simply to add my agreement with the judgment and reasons of Lord Dyson. That intention was formed on the basis that it is rarely helpful to publish a concurring judgment which does no more than repeat the conclusions and reasoning of the principal writer. However, in the light of the sharp division of opinion between the members of the court, I offer this short contribution. I remain of the view that this appeal should be dismissed for the reasons given by Lord Dyson. I also agree with the reasoning in the short judgment written by Lord Collins In particular, I agree with them that the questions raised by the issues in this appeal depend, not upon the ordinary law of trusts, but on the true construction of the relevant provisions of CASS 7. Lord Dyson has described with clarity the factual background against which CASS 7 must be construed. The most important features of that background are MiFiD and the Implementing Directive, the purposes of which include providing a high level of protection for all clients who provide moneys for investment on their behalf. As I see it, one of the principal purposes of CASS 7 is to provide protection as between clients on the one hand and the firm on the other. Clients as a whole have a higher level of protection if all clients who have provided money and who have a claim against the company are entitled to claim against the pool than if such claims are limited to those with a proprietary right. I do not see anything odd or inappropriate in such a conclusion. On the contrary, it seems to me to be consistent with the principles underlying MiFiD and the Implementing Directive All the judges who have considered the issues have concluded that a trust arises on receipt of client moneys by the firm. Thus CASS 7.7.2(1)R provides that a firm receives and holds money for the purposes of the client money rules and the distribution rules. By CASS client money means any money that a firm receives or holds for or on behalf of a client. It follows that the fiduciary duties imposed by CASS are owed by the firm before there is segregation of client moneys and whether or not there has been segregation. By CASS , which is under the heading Discharge of fiduciary duty, money ceases to be client money in certain specific circumstances, notably when it is paid away on the instructions of the client. Until then, the money remains client money and, importantly, the firm retains fiduciary duties in relation to it. I agree with Lord Collins approach to the first issue. Page 47

188 112. In particular I agree with Lord Collins conclusion at para 192 that, if the trust does not arise until segregation, then whether or not clients are protected by CASS 7 would become arbitrary and dependent upon the firm s own practices; and the greater the level of incompetence or misconduct on the part of the firm, the less the protection for the clients. This consideration seems to me to support the conclusion that CASS 7 is intended to protect all clients who provided money and have contractual claims Similar considerations support Lord Dyson s conclusions on the second issue at paras 161 to 167, namely that money received by the firm before a PPE is to be treated as pooled, whether it is received before or after the PLS. In particular I agree with his conclusions at paras 164 to 167. By CASS 7.9.6R(1), if a PPE occurs, client money held in each client money account of the firm is treated as pooled. I agree with Lord Dyson at para 164 (and Lord Neuberger of Abbotsbury MR [2011] Bus LR 277, paras 207 and 208), that the expression client money account of the firm should be given the wider meaning, namely that it extends to any account of the firm into which client money has been paid and that it is not restricted to segregated client money accounts. I agree with Lord Dyson at para 165 that to exclude identifiable money in house accounts from the distribution regime runs counter to the policy underlying CASS, which is to provide a high degree of protection to all clients in respect of money in each money account of the firm (Lord Dyson s emphasis) As I read CASS, it is only CASS 7.9.6R(1) which governs what money is treated as pooled. Thus it is only client money held in a client money account. If the narrower meaning is given to that expression, only money held in a segregated account is included. All other client money, whether received in the gap period between the PLS and the PPE, or before the PLS and not segregated (although it ought to have been), will not be treated as pooled because it would not be covered by CASS 7.9.6R(1) and there is no other provision of CASS under which it would be so treated Yet it is accepted by Lord Walker and Lord Hope that it would be unsatisfactory to exclude money which could not have been segregated because it was received by the firm after the PLS because of the inevitable time gap between segregations. They therefore accept that unsegregated moneys received by the firm between the PLS and the PPE should be treated as pooled and that a reconciliation should take place as at the PPE. They prefer that approach ( the final reconciliation theory ), to the general trust theory, under which clients whose money is stranded in a house account during the gap period would have to rely upon the general law of trusts. I agree with them that it would be unsatisfactory to exclude money which was received after the PLS. However, as I see it, the difficulty with the final reconciliation theory, if it is limited to money received in the gap period between the PLS and the PPE, is that it has no support in CASS. Page 48

189 116. I agree with Arden LJ [2011] Bus LR 277, para 142 and Lord Walker that there must be a final reconciliation as at the PPE. I can however see no reason why it should be limited to money received after the PLS and in this respect I agree with Arden LJ at para 142. It seems to me that it must be the duty of the administrators to conduct the reconciliation exercise fully and effectively. Thus, in principle, it must be their duty to conduct the reconciliation in accordance with CASS 7. I see no warrant for their being entitled to assume that the segregation as at the last PLS had been carried out correctly. Indeed, in a case where the failure of the firm has caused the PPE, it is not unlikely that the firm will not have done so There are many possible ways in which the firm may have carried out the last segregation otherwise than in accordance with CASS. For example, there may have been no segregation for several days (or more) before the PPE. Or the firm may have segregated only the funds of one client (or some clients) and not others, or it may have segregated only some of a particular client s (or particular clients ) money. A number of questions arise. For example, what would be the position if the firm had conducted no segregations at all for some days preceding the PPE? Would the administrator s final reconciliation cover: (a) all identifiable moneys deposited between the date of the last actual segregation and the PPE; or (b) all identifiable moneys deposited between the date when the last segregation ought to have taken place and the PPE? 118. Neither option seems satisfactory. Option (a) draws a sharp dividing line at the time of the last actual segregation, no matter how limited (would a single act of segregation suffice?) or ineffectual (would segregation of 1 suffice?) it may have been. However option (b) draws an arbitrary distinction between clients who deposited moneys during the last business day before the PPE and all other clients. If LBIE wholly failed to comply with their segregation obligation for several days in a row, why afford preferential treatment to clients who deposited funds on the last day before the PPE? All these clients funds would be unsegregated and, as I see it, they should be treated in the same way. Either they should all be treated as having money in the pool or none of them should be so treated As I understand it, Lord Walker and Lord Hope accept that unsegregated client money received by the firm between the PLS and a PPE must be treated as pooled under CASS 7.9.6R(1). In my opinion, that is only permissible on the basis that client money in a firm account is held in a client money account of the firm. It seems to me that, if that is so, there is no reason not to hold that client money held in a firm account before the PLS is also in a client money account of the firm. In these circumstances, in agreement with Lord Dyson at paras 165 and 167 and with the Court of Appeal (per Arden LJ at paras 124 to 142 and Lord Neuberger at paras 204 to 224), I would hold that the primary pooling arrangements apply to client money in firm accounts whenever it was paid in and that issue 2 should be answered on that basis. That conclusion seems to me to be Page 49

190 entirely consistent with the conclusion (reached by everyone) that a trust comes into existence on receipt of client money by the firm The answer to issue 2 seems to me to point the way to the answer to issue 3. Although I can see that, if issue 3 is taken first, it can be said with some force that the reverse is the case, it does seem to me that, logically, it is sensible to take issue 2 first, as the Court of Appeal did. It makes more sense to identify the CMP before deciding who should share in it rather than the other way round I agree with Lord Neuberger at para 226 that, as he put it, it could be dangerous to look at the general law of trusts because CASS 7 is intended to be a code. The distribution model underlying the CASS 7 trust differs markedly from that of private trust law. The focus of issue 3 is CASS 7.9.6R(2), which provides that, if a PPE occurs: (2) the firm must distribute that client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R. It appears to me that, if that paragraph is read as a whole, as to my mind it should be, the words after the comma are of considerable importance because they tell the firm that it must distribute client money so that each client receives a sum which is rateable to the client money entitlement in accordance with CASS 7.9.7R. In short, the distribution must be in accordance with CASS Reference to that provision seems to me strongly to support the claims basis I agree with Lord Neuberger s conclusion at para 227 that, once one accepts that client money includes such money when paid into a mixed money house account, then the concept of "client money entitlement" carries with it the notion of all money, which (in my opinion correctly) he says is a point reinforced by CASS 7.9.1R As Lord Dyson notes at para 152, the judge (at para 243) described the respondents case on the construction of CASS as involving a formidable textual argument. With apologies for repetition, but because of what I regard as its significance in this appeal, I set out the argument again here. In para 242, after referring to CASS 7.9.6R(2) and underlining calculated in accordance with CASS 7.9.7R, the judge said: Page 50

191 ii) CASS 7.9.7R requires, on a client by client basis, a netting process to be carried out between each client's individual client balance and that client's client equity balance. iii) CASS 7.9.9R(2) makes it clear (albeit for a different purpose) that the client money entitlement for each client will be calculated in accordance with CASS 7.9.7R as at the time of the PPE. iv) The phrase client equity balance is defined in the Glossary by reference to the amount which a firm would be liable to pay to a client in respect of that client s margined transactions if each of his open positions was liquidated at the prices published by the relevant exchange and his account closed. It is a form of entitlement having nothing to do with the amount contributed by the client to the firm's segregated accounts. v) The phrase individual client balance is not a term defined in the Glossary, but it is fully explained in paragraph 7 of Annex 1, again in terms which are based upon the contractual position between the client and the firm, rather than the amount actually contributed by the client to the firm's segregated accounts. vi) Thus it necessarily follows that the phrase client money entitlement, where used both in CASS 7.9.6R(2) and 7.9.9R(2) is a reference to the client s contractual entitlement to have money segregated for it, rather than to the client's proprietary interest in the CMP, derived from having had its money actually segregated, ie paid into the segregated accounts from which the CMP is constituted Lord Dyson has considered and rejected the reasons given by the judge for not accepting the textual argument. I agree with Lord Dyson s conclusions at paras 152 to 160. In particular, I agree with him that there is no legitimate basis upon which CASS 7.9.6R(2) can be construed by disregarding the words after the comma. On the contrary, as indicated above, they point the way. Moreover, they are mandatory and clear. I agree with Lord Dyson that there is no good reason for construing the expression each client in CASS 7.9.6(2) as being limited to each client for whom money is held. As I see it, each client means what it says and thus includes each client who deposited money and has a claim. Further, I see nothing ambiguous in the reference in CASS 7.9.6(2) to CASS 7.9.7R. It simply provides that the client money entitlement must be calculated in accordance with CASS 7.9.7R There are a number of difficulties with the contributions approach. For example, the consequence of treating the PLS as the critical moment is that parties Page 51

192 whose moneys were deposited in house accounts after the PLS would certainly have their funds effectively segregated by the administrators (provided that those moneys are still identifiable). Those parties would therefore be able to participate in the CMP. By contrast, clients whose moneys were deposited before the PLS would only be able to participate in the CMP if the firm actually complied with their obligation to segregate those funds. Given the firm s widespread failure to comply with this obligation, many of those clients would not be able to participate in the CMP. The net effect would be that parties who deposited funds in house accounts after the PLS would be likely to be in a better position than parties who deposited funds in house accounts before the PLS. This seems to me to be a strange result If, as I believe to be the case, CASS 7.9.7R applies to any distribution, there can in my opinion be no real doubt that the claims basis must be correct. If the basis of the right to claim were a contributions basis, a client s entitlement to participate in the CMP would depend on whether or not it had made a contribution to the CMP. Yet the distribution rules, namely CASS 7.9.6R and 7.9.7R, make it clear that the quantum of a participant s share depends not upon the size of their contribution to the pool but upon the size of their contractual entitlement vis-à-vis the firm. In this regard I agree with the conclusions of Arden LJ at paras 154 to 164. In particular I agree with her concerns expressed in paras 156 and 157 that, on the contributions basis, significant problems arise which cannot be dismissed as a glitch in the way in which they were by the judge at para In short I agree with Lord Dyson, Lord Neuberger, Arden LJ (and indeed Sir Mark Waller) that the natural construction of the CASS rules is that client moneys as at the PPE are to be distributed on a claims and not a contributions basis. I also agree with them that such a construction gives better effect to the underlying purpose of the CASS code, namely the protection of all those who deposited money with the firm. LORD DYSON 128. I am grateful to Lord Walker for setting out the facts and the relevant documentation so clearly and so comprehensively. This appeal raises three issues concerning the true construction of CASS 7. These are (i) when does the statutory trust created by 7.7.2(R) arise; (ii) do the primary pooling arrangements apply to client money held in house accounts; and (iii) is participation in the notional client money pool ( CMP ) dependent on actual segregation of client money? I agree with the conclusions of Briggs J, the Court of Appeal and Lord Walker, Lord Hope and Lord Collins on the first issue. I cannot improve on their reasons for holding that the statutory trust created by 7.7.2(R) arises at the time of the firm s receipt of Page 52

193 the client money. But I have reached a different conclusion from that of Briggs J, Lord Walker and Lord Hope on the second and third issues. Before I turn (to the extent that it is necessary to do so) to the points of detail that have been debated so meticulously, I wish to make two preliminary points. Two preliminary points 129. The first point is that CASS 7 provides a detailed code for the safeguarding of client money by firms regulated by the Financial Services Authority. On the assumed facts, there was shocking underperformance by LBIE. As the judge put it, there was non-compliance with the regulatory requirements on a truly spectacular scale (para 4). Furthermore, the most significant group of clients whose money LBIE failed to segregate was its own affiliates, who have advanced money claims against LBIE in excess of $US 3 billion. But it is important not to allow these exceptionally striking facts to influence the outcome of this appeal. The issues of construction that are raised are of general application. Their resolution cannot depend on the size of the firm or the scale of its non-compliance or the identity of the particular client in question. Indeed, G states that a firm that holds money on behalf of, or receives money from, an affiliated company in respect of MiFID business must treat the affiliated company as any other client of the firm for the purposes of [chapter 7] The second point that I wish to emphasise at the outset is that the client money which is subject to the statutory trust is any money that a firm receives from, or holds for, or on behalf of, a client in the course of, or in connection with, its MiFID business unless otherwise specified in this section (7.2.1R). Accordingly, unless otherwise specified in section 7.2, all client money is subject to the statutory trust. The Directives 131. It is not in issue that CASS 7 was made for the purpose of fulfilling the EU requirements contained in the Markets in Financial Instruments Directive 2004/39/EC ( MiFID ) and the Commission Directive 2006/73/EC ( the Implementing Directive ) and that CASS 7 should therefore be interpreted, as far as possible, so as to give effect to these Directives: see, for example, HM Revenue and Customs Comrs v IDT Card Services Ireland Ltd [2006] STC As Arden LJ explained at paras 59 to 62 of her judgment, this requires a two-stage test to be applied. The first involves interpreting the Directives. The second involves interpreting CASS 7 in the light of the meaning of the Directives. At para 57 of his judgment, Briggs J correctly stated that domestic legislation which is made for the purposes of fulfilling the requirements of EU law contained in a Directive must be Page 53

194 interpreted in accordance with the following principles: (i) it is not constrained by conventional rules of construction; (ii) it does not require ambiguity in the legislative language; (iii) it is not an exercise in semantics or linguistics; (iv) it permits departure from the strict and literal application of the words which the legislature has elected to use; (v) it permits the implication of words necessary to comply with Community law; and (vi) the precise form of the words to be implied does not matter The purposes of MiFID and the Implementing Directive include providing a high level of protection for clients and safeguarding their rights to funds in the event of the insolvency of the firm to which their funds have been entrusted. The recitals to MiFID include recital (2) which states it is necessary to provide for the degree of harmonisation needed to offer investors a high level of protection (emphasis added); recital (17) which states that persons who provide the investment services and/or perform their investment activities covered by this Directive should be subject to authorisation by the home member states in order to protect investors and the stability of the financial system ; and recital (26) which provides: in order to protect an investor s ownership and other similar rights in respect of securities and his rights in respect of funds entrusted to a firm, those rights should in particular be kept distinct from those of the firm. The aim of protecting investors is also expressed in recitals (31), (44), (61) and (71). Article 13(7) of MiFID requires an investment firm to make adequate arrangements in relation to financial instruments belonging to clients to safeguard clients ownership rights, especially in the event of the investment firm s insolvency. Article 13(8) requires an investment firm, when holding funds belonging to clients, to make adequate arrangements to safeguard the clients rights and prevent the use of client funds for its own account The Implementing Directive contains detailed rules for giving effect to the objectives of MiFID. Its recital (2) states that rules for the implementation of the regime governing organisational requirements for investment firms should be consistent with the aim of [MiFID]. Recital (5) states that the rules for the implementation of the regime governing operating conditions for the performance of investment services and activities should reflect the aim underlying that regime. That is to say they should be designed to ensure a high level of investor protection to be applied in a uniform manner through the introduction of clear standards and requirements governing the relationship between an investment firm and its client (emphasis added). Article 16 of the Implementing Directive contains rules for safeguarding client assets and gives effect to article 13(7) and (8) of MiFID. Article 16(1) makes provision for record-keeping and accounts (para (1)(a) and (b)); conduct of reconciliations (para (1)(c)); ensuring that client financial instruments and funds that are deposited are identified separately, ie are segregated (para (1)(d) and (e)); and organisational arrangements designed to minimise the risk of loss or diminution of client assets or of rights in connection with those Page 54

195 assets, as a result of fraud, poor administration, inadequate record-keeping or negligence (para (1)(f)). Article 16(2) provides: If, for reasons of the applicable law, including in particular the law relating to property or insolvency, the arrangements made by investment firms in compliance with paragraph 1 to safeguard clients rights are not sufficient to satisfy the requirements of article 13(7) and (8) of [the MiFID Directive], member states shall prescribe the measures that investment firms must take in order to comply with those obligations It follows that the effect of article 13(7) and (8) of MiFID and article 16(2) of the Implementing Directive is that member states are under a duty to prescribe measures that firms should take to ensure that there are adequate arrangements under the domestic law relating to insolvency to safeguard the clients rights to funds belonging to them in order to achieve the investor protection purpose of MiFID When dealing with the first issue, Briggs J acknowledged the importance of interpreting CASS 7 by reference to the MiFID Directives (para 148). He said in relation to the first issue that an interpretation of 7.7.2R by reference to the Directives was strongly supportive of the case that a trust of client money received by a firm arises upon receipt, rather than only upon segregation. He added: Quite simply, that analysis better serves the MiFID objectives of protecting clients rights in relation to their funds, both from use of those funds for the firm s own purposes, and from the consequences of the firm s insolvency. He added that the imposition of a statutory trust was the kind of additional requirement contemplated by article 16(2) of the Implementing Directive necessary to make the requirements set out in article 16(1) effective in the context of the domestic law of a particular member state. I entirely agree with this approach When he came to deal with the third issue, he did not derive decisive assistance from an analysis of the purposes behind the MiFID Directives. He said (para 234): On the one hand it may be said that the general aspiration to provide a high level of investor protection is best served by conferring a right to share in the CMP upon all clients whose money should have been segregated, whether or not it was. On the other hand, the MiFID Directives are, as I have sought to explain, aimed at the establishment of obligations and organisational requirements which, if complied with, would protect clients funds both from Page 55

196 misuse by the firm, and from loss occasioned by the firm s insolvency. The contemplation of the Directives was that this would be achieved by identification, reliable accounting and segregation, such that clients money actually dealt with in that way would be protected, but not otherwise I shall examine the third issue later in this judgment. It seems that the judge considered that the underlying purpose of the Directives was sufficiently met by the introduction into our domestic law of the organisational requirements specified in article 16(1) of the Implementing Directive. In other words, the requirement in article 13(7) and (8) of MiFID to make adequate arrangements to safeguard the client s rights in relation to financial instruments and funds would be satisfied by meeting the specific requirements of article 16(1) of the Implementing Directive. But the requirements prescribed by article 16(1) are not to be equiparated with the requirements stated in article 13(7) and (8) of MiFID. Indeed, as the judge recognised when he addressed the first issue, article 16(2) contemplates that the arrangements made by investment firms in compliance with article 16(1) might not be sufficient to satisfy the requirements of article 13(7) and (8) of MiFID The important point, however, is that the judge rightly acknowledged the principle that it is necessary to construe CASS 7 in a manner which promotes the purpose of providing a high level of protection for clients as required by the Directives. The third issue 139. The second and third issues are closely related. Lord Walker and Lord Hope prefer to start with the third issue. I am content to take the same course. The question raised by this issue is whether participation in the CMP is based on (i) the amount of client money which has actually been segregated at the date of the primary pooling event ( PPE ) (the so-called contributions basis for participation) or (ii) the amount which ought to have been segregated at that date (the so-called claims basis for participation). The resolution of this issue depends on the proper interpretation of 7.9.6R, 7.9.7R and 7.7.2R. The starting point is 7.7.2R which provides that a firm receives and holds client money (ie any money that it receives from or holds for, or on behalf of, a client) on the terms set out in 7.7.2R (1) to (5). The beneficiaries of the trust are identified at 7.7.2R (2) as being the clients...for whom [the client money] is held, according to their respective interests in it and the trust is for the purposes of and on the terms of the client money rules and the client money (MiFID business) distribution rules (7.7.2R(1)). The client money rules are defined as the rules contained in 7.1 to 7.8. The client money (MiFID business) distribution rules ( the distribution rules ) are defined as the rules contained in 7.9. Page 56

197 140. I accept that until a PPE occurs, client money is held for the purposes of 7.3, 7.4, 7.5, 7.6 and 7.8 (ie safeguarding, segregation, transfer to third parties, record keeping and internal reconciliation and protection (by notice to banks) of client money bank accounts). As Lord Walker says (para 77), these purposes are directed to the protection and management of clients money in the beneficial ownership of clients who are identified beneficiaries of the trust, being those (as 7.7.2R(2) puts it) for whom that money is held, according to their respective interests in it Lord Walker says (at para 78) that the biggest objection to the claims basis of interpreting 7.9.6R is that it involves on the assumed facts of this case a cataclysmic shift of beneficial interest on the PPE, to the detriment of those clients who must have supposed that their funds were safely segregated in accordance with CASS 7.1 to 7.8. It would amount to the segregated clients funds being used as a strange form of compensation fund for disappointed clients whose funds had not been segregated It is true that, on the assumed facts of this case, the claims basis can be said to involve a cataclysmic shift of beneficial ownership on the PPE. But that is because, on the assumed facts, there was a spectacular failure to comply with the CASS 7 rules for a very long period. But I have already counselled against allowing the exceptional nature of the assumed facts to compel a particular conclusion to the issues of construction that arise in this case More importantly, CASS 7.7.2R provides that the trust is for the purposes and on the terms of the client money rules and the distribution rules. Thus 7.7.2R itself points to the beneficiaries under the distribution rules as being all the clients for whom the firm has received and is holding client money. In other words, such interest under the trust as any clients have is expressly on the terms of the distribution rules, of which 7.9.6R is the principal operative provision Lord Walker says that the notion that clients must be taken to have implicitly accepted the risk of discovering, on a PPE, that their carefullysegregated funds must be shared with non-segregated clients (including LBIE s own affiliates) seems quite unrealistic (para 79). I respectfully disagree. The general scheme of CASS 7 is that all client money is subject to a trust that arises upon receipt of the money by the firm. This includes money received from the firm s affiliated companies. I have already referred to the wide definition of client money in 7.2.1R (para 130 above). The client money rules are, therefore, intended to protect all the clients money received prior to a PPE. The distribution rules are intended to protect all the clients money in the event of a PPE. There is nothing surprising in the notion that, once a PPE occurs, the treatment of client money is subject to a different regime from that to which it was subject before. It is the Page 57

198 exceptional nature of the assumed facts in this case which makes the consequences of a change of regime so striking. I accept that, in order to reach a conclusion on the third issue, it is necessary to examine the language of the relevant rules. But I start from the position that it is not inherently unlikely that the draftsman intended that clients with established proprietary interests in segregated funds should have those interests disturbed by the distribution rules in the event of a PPE. There is no a priori reason why the draftsman would not have intended to produce a scheme pursuant to which the protection afforded to clients is modified in the event of a PPE. There is nothing unrealistic in a scheme which provides that, in the event of the failure of a firm, the beneficial interests in the client money are adjusted so as to provide that each client receives a rateable proportion of the aggregate of all the client money; in other words that all clients share in the common misfortune of the failure The draftsman had to decide what provision to make for the distribution of client money in the event of a PPE. He could have decided that pooling and distribution was to be limited to client money which had been segregated or that it should include all client money. That was a policy choice he had to make. Which choice he made depends on the true construction of CASS 7. In my view, it does not depend on a consideration of any general principles of trust law. I acknowledge that segregation is an important part of the CASS 7 system. But it does not follow that the draftsman intended that upon a PPE only segregated client money would qualify for distribution under the distribution rules As Mr Miles points out, on any view of the distribution rules, client money which has been segregated is treated as pooled on a PPE and must be distributed so that each client receives a rateable share of the CMP. The distribution model underlying the CASS 7 trust therefore differs from that of private trust law. To this extent at least, the notion that a client has a fixed beneficial interest in the segregated moneys which cannot be disturbed on the failure of a firm is incorrect. The only question is how far that disturbance goes: is the rateable sharing with other segregated clients or with all clients? 147. As I have said, the resolution of this question depends on the true construction of the relevant provisions of CASS 7. But in approaching this question of construction, it is necessary to bear in mind that (i) all client money is subject to the statutory trust and, (ii) where there is a choice of possible interpretations, the court should adopt the one which affords a high degree of protection for all clients who have client money with the firm and to safeguard their interests, thereby furthering the purposes of the Directives. It is not the purpose of the Directives to provide a level of protection only for those clients who are recorded in the firm s ledger as clients with client money entitlements when the firm calculated the net amount to segregate at the last reconciliation. Page 58

199 148. Lord Walker is of the view that, in construing CASS 7, we have to look at its essential scheme and structure. Beyond that, he says, a purposive approach gives little assistance, since it is plain that neither the Directives nor CASS 7 contemplate non-compliance with regulatory requirements (paras 48 and 81). But even if the premise that the Directives did not contemplate non-compliance with regulatory requirements is correct, it does not follow that rules introduced by member states to give effect to the Directives should not be construed in the manner which best fulfils the overriding purpose of the Directives to provide a high degree of protection to money entrusted by clients to investment firms. If there are two possible interpretations of CASS 7, it seems to me to be axiomatic that the interpretation which more closely meets the purpose of the Directives should be adopted. I do not see how this can be affected by whether the Directives did or did not contemplate non-compliance with the regulatory requirements As I have already said, the judge did not derive decisive assistance from the Directives because he considered that their purpose was met by the incorporation in CASS 7 of requirements which satisfy the provisions of article 16(1) of the Implementing Directive. But article 16(2) makes it clear that member states are required to prescribe the measures that firms must take in order to comply with the obligations set out in article 13(7) and (8) of MiFID, if compliance with article 16(1) does not suffice. I do not see why the existence in domestic law of rules which satisfy the requirements of article 16(1) makes it unnecessary to interpret the distribution rules contained in 7.9, so far as possible, as imposing obligations which satisfy the requirements of article 13(7) and (8) of MiFID, thereby affording clients a high degree of protection I now turn to examine some of the detailed points arising from the language of the relevant provisions of CASS 7. So far as material, 7.9.6R provides: If a primary pooling event occurs: (1) client money held in each client money account of the firm is treated as pooled; and (2) the firm must distribute that client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R. Page 59

200 151. Mr Miles relies on the reference to a calculation in accordance with CASS 7.9.7R as supporting the claims basis rather than the contributions basis for participation. The steps in the argument were carefully set out by the judge at para 242 of his judgment as follows: (i) CASS 7.9.6R(2) requires the firm to distribute client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R [his underlining]. (ii) CASS 7.9.7R requires, on a client by client basis, a netting process to be carried out between each client s individual client balance and that client s client equity balance. (iii) CASS7.9.9R(2) makes it clear (albeit for a different purpose) that the client money entitlement for each client will be calculated in accordance with CASS 7.9.7R as at the time of the PPE. (iv) The phrase client equity balance is defined in the Glossary by reference to the amount which a firm would be liable to pay to a client in respect of that client s margined transactions if each of his open positions was liquidated at the prices published by the relevant exchange and his account closed. It is a form of entitlement having nothing to do with the amount contributed by the client to the firm s segregated accounts. (v) The phrase individual client balance is not a term defined in the Glossary, but it is fully explained in paragraph 7 of Annex 1, again in terms which are based upon the contractual position between the client and the firm, rather than the amount actually contributed by the client to the firm s segregated accounts. (vi) Thus it necessarily follows that the phrase client money entitlement, where used both in CASS 7.9.6R(2) and 7.9.9R(2) is a reference to the client s contractual entitlement to have money segregated for it, rather than to the client s proprietary interest in the CMP, derived from having had its money actually segregated, ie paid into the segregated accounts from which the CMP is constituted. Page 60

201 (vii) By way of a postscript, Mr Knowles submitted that, in any event, not all contributions to the segregated accounts were made in respect of particular clients. For example, he pointed to the prudential payments contemplated by CASS R. Segregation in relation to depot breaks is another example: see below At para 243, the judge described this as a formidable textual argument. He rejected it for the following principal reasons. First, the phrase client money entitlement means different things in different places, so that its meaning in any particular paragraph must be informed by its context. Secondly, (for the reasons that he gave at paras 255 to 262) the correct interpretation of 7.9.7R does not support the claims basis for participation in the CMP. He pointed out that 7.9.7R does not purport to constitute a comprehensive formula for the calculation of a client money entitlement. It merely provides for the offset of two particular types of accounting debit against two particular types of accounting credit. It is a reducing mechanism, whose effect is, in the stated circumstances, to reduce what otherwise might have been identified as a client s client money entitlement, which is to serve as the basis for his rateable participation in the CMP (para 255). He said that the existence of these offsetting provisions is not sufficient to indicate that it was intended to go behind the last internal reconciliation account to establish if necessary by enormous forensic endeavour and even litigation, the true contractual entitlements of the firm s clients to have their money segregated, without limitation in historical time, so as to include un-segregated and partially segregated clients as beneficiaries of the CMP, with obvious adverse consequences in terms of the timely and efficient distribution of the pooled client money to the clients entitled to it (para 261) Both the judge (para 232) and Lord Walker (para 97) said that the purpose of 7.9.7R is obscure and, at least by inference, that the reference to it in 7.9.6R(2) cannot bear the weight that Mr Miles seeks to place on it. But I do not think that the reference in 7.9.6R (2) to the sum being calculated in accordance with CASS 7.9.7R can be brushed aside so easily. CASS 7.9.7R provides for a calculation which takes account of each client s individual client balance and client equity balance. The individual client balance calculation is dealt with in detail in para 7 of Annex 1. The client equity balance is defined in the glossary as the amount which a firm would be liable (ignoring any non-cash collateral held) to pay to a client (or the client to the firm) in respect of his margined transactions if each of his open positions was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and his account closed. As Mr Miles says, the calculation involves an assessment of the client s actual and objective entitlement in respect of client money. It has nothing to do with the amount which may or may not in fact have been segregated for the client, nor with the ledger entries which the firm may have made in respect of any particular segregation or reconciliation. Page 61

202 154. The reducing mechanism interpretation favoured by the judge (and supported by Mr Zacaroli) treats the phrase client money entitlement in 7.9.6R(2) as envisaging (i) a calculation by reference to the historical amounts recorded in the ledgers, and (ii) (as a downward adjustment) a calculation by reference to 7.9.7R. But there is no support for this two-fold scheme of calculation in the language. As Mr Miles points out, 7.9.6R(2) simply refers to the client money entitlement being calculated in accordance with 7.9.7R Like Lord Neuberger MR (para 230), I do not consider that there are sound reasons for rejecting the formidable textual argument Lord Walker at para 94 (in agreement with the judge) says that, if 7.9.6R(2) had stopped at the comma after in accordance with CASS 7.7.2R, there would have been no doubt that the right to receive a distribution from the CMP was limited to those clients for whom the firm had actually segregated client money or those identified as entitled to participate in the distribution in the last reconciliation. They were under 7.7.2R(2) the clients for whom that money is held and it was to be distributed according to their respective interests in it. Lord Walker says that each client in 7.9.6R does not mean what it says; in context, it means each client for whom client money is held I see the force of this argument. But 7.9.6R(2) must be read as a whole, including the words which follow the comma after in accordance with CASS 7.7.2R. So read, I think the better interpretation is that the right to share in a distribution is given to each client of the firm, so that all clients with a client money entitlement are entitled to share. That is what 7.9.6R(2) says. The reason for referring back to 7.7.2R is not to identify the client money that is to be distributed (that is done in 7.9.6R(1) and (2)). It is to introduce the order of priorities referred to in 7.7.2R. Thus, for example, the incorporation of 7.7.2R(2) throws the costs properly attributable to the distribution of client money on to the client money (rather than on to the general assets of the firm). The costs of distribution will have to come from the trust before division to clients One final textual point. I think that Mr Miles is right to say that some support for his case on the meaning of client money entitlement can be found in 7.9.9R(2). This creates an exception from the usual rule that all client money received by the firm after a PPE must be returned to the client. The exception is where it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 7.9.7R, shows that money is due from the client to the firm at the time of the primary pooling event. This is a reference to a calculation being performed in the manner prescribed in Annex 1 (albeit with mandatory off-setting). The exercise is intended to establish whether, objectively and in fact, the client is a debtor of the firm, in which case the firm can Page 62

203 keep the money. In the context of 7.9.9R(2), client money entitlement has nothing to do with the amounts actually segregated for a client by the firm. It is telling that 7.9.9R(2), like 7.9.6R(2), requires the client money entitlement to be calculated in accordance with 7.9.7R as at the date of the PPE To summarise, for the reasons that I have given, the language of the relevant provisions of CASS 7 tends to support the claims basis for participation in the CMP. I accept, however, that the linguistic points are not conclusively supportive of this interpretation. That is why it is necessary to stand back from the detail and ask which interpretation better promotes the purpose of CASS 7. In my view, a purposive interpretation clearly supports the claims basis for participation. This basis better reflects the fact that all client money is subject to the statutory trust and that CASS 7 is intended to give effect to the Directives whose overriding purpose is to safeguard the assets of all clients and to provide all clients with a high degree of protection. I should add that we heard detailed submissions about the complexities of the process that the claims basis would entail and the inevitable costs and delay that it would occasion. The judge was impressed by these points: see, for example, para 152 above. I have little doubt that distribution on the claims basis in this case would be complex and would take a long time to complete. That is because of the extraordinary circumstances of this case. In other cases, the position might well be very different. But it has not been shown that, in a typical case, the complexity of the claims basis will necessarily be greater than that of the contributions basis. Still less has it been shown that, in a typical case, the complexity of the claims basis will be so much greater than that of the contributions basis that the draftsman could not have intended the former. I do not think that it would be right to allow the scale of the exercise that would be required in this case to lead to a solution which, for the reasons that I have given, would defeat the underlying purpose of CASS For the reasons that I have given, I have reached the strong provisional conclusion that participation in the CMP is not dependent on actual segregation at the time of the PPE. But I recognise that the second and third issues are closely linked. The third issue concerns the true construction of 7.9.6R(2). The second issue concerns the true construction of 7.9.6R(1). The closeness of the link between the two issues is seen clearly in 7.9.6R(2) which provides that the firm must distribute that client money in accordance with CASS 7.7.2R (underlining added). That client money is the client money referred to in 7.9.6R(1), ie client money held in each client money account of the firm. The second issue focuses on whether the client money to be distributed must be in a client account or may be identifiable client money held in a house account of the firm. Page 63

204 The second issue 161. If, as Lord Walker and Lord Hope would hold, participation in the CMP is dependent on actual segregation at the time of the point of last segregation ( PLS ), then the second issue is limited to the question whether there is anything in CASS 7 or the general law of insolvency to prevent a final internal reconciliation from being carried out on the data as they were at the PPE, but limited to taking account of events during the gap period between the PLS and the PPE (and not reopening previous reconciliations down to and including the PLS) In the light of the conclusion that I have reached on the third issue, the second issue cannot be viewed so restrictively. It is necessary to decide whether 7.9.6R(1) requires all identifiable client money to be treated as pooled, or only that client money which is held in the firm s segregated client accounts. The phrase client money account of the firm is not defined. As a matter of ordinary language, the phrase client money account is capable of meaning (i) an account which contains or is intended to contain exclusively client money or (ii) an account of the firm which contains client money. Even where a firm is fully compliant, CASS 7 contemplates that client money will be held in the firm s own account. Thus, where the alternative approach of payment of client money into a client bank account is adopted under G, G and G, the firm may receive client money into its own bank account before (on the next business day) paying it out to or on behalf of the client (see G). The question of whether a house account in which client money is held is a client money account of the firm arises, therefore, both in relation to money held by the firm where it adopts the alternative approach and where (as in the present case) it wrongly retains client money in its own account A number of detailed textual points have been made on both sides of the argument. Some of these are discussed by Lord Neuberger at paras 205 to 215 of his judgment. I agree with his conclusion on these (para 223) that they are fairly limited in their value and pretty finely balanced in their relative strengths and that overall they do not favour either interpretation. I, therefore, see no point in rehearsing them in this judgment Since an examination of the text shows that there are two possible interpretations of the phrase each client money account of the firm, it seems to me that the correct interpretation is the one which best promotes the purpose of CASS 7 as a whole. As I have already explained, the fundamental purpose of CASS 7 is to provide a high level of protection for client money received by financial services firms. That is why all client money received from or held for or on behalf of a client in the course of, or in connection with its MiFID business (7.2.2R) is held on trust upon receipt and why the other client money rules in 7.1 Page 64

205 to 7.8 are expressed as they are; and that is the policy underlying the distribution rules To exclude identifiable client money in house accounts from the distribution regime runs counter to this policy. It creates what was referred to in argument as a bifurcated scheme which provides clients with different levels of protection, namely a right to claim in the CMP under the CASS 7 rules for those whose money is held in segregated client accounts but no right (other than a right to trace in equity) to those whose money is held in the firm s house accounts. The purpose of the scheme (as required by the Directives) is to provide a high level of protection to all clients and in respect of client money held in each money account of the firm. That purpose would be frustrated if the protection were restricted in this way. As Mr Miles and Mr Crow point out, a bifurcated scheme would provide clients with different levels of protection based on the happenstance of whether the firm has segregated money on behalf of that client. That is an arbitrary basis for a scheme which is intended to provide protection to all clients who entrust their money to a firm. It is unlikely that the draftsman of CASS 7 intended the scheme to have this effect. It is improbable that the draftsman contemplated that there would be two regimes substantially in operation for the distribution of client money (one under the CASS 7 rules set up for the purpose and one under equitable tracing principles and outside CASS 7) There is the further point that, in view of the overriding purpose of the scheme, it is unlikely that client money which had yet to be segregated under the alternative approach was intended to be treated differently from client money which had been segregated, whether under the normal approach or the alternative approach. It is unlikely that the draftsman would have intended that a client who makes a payment to a firm which adopts the alternative approach should, albeit for a short period, be at risk in a way in which a client who makes a similar payment to a firm which adopts the normal approach would not be. Lord Walker and Lord Hope recognise the force of this last point. They would meet it by holding that a final reconciliation must be carried out on the data as they were at the PPE limited to taking account of events during the gap period (and not reopening previous reconciliations down to and including the PLS). I accept that, in relation to client money received after the PLS, this interpretation avoids bifurcation, achieves symmetry and assimilates the effect of the alternative approach with that which would have occurred under the normal approach. But it does not avoid bifurcation or achieve symmetry as between client money received before the PLS which is held in segregated clients accounts and client money which is held in the firm s house accounts I would hold, in agreement with the Court of Appeal, that the primary pooling arrangements apply to client money in house accounts. This conclusion is Page 65

206 consistent with and reinforces the conclusion which I have expressed on the third issue In these circumstances, it is not necessary to deal with the alternative submission of Mr Miles that, as at the PPE, the firm remains a regulated firm subject to CASS 7 and is therefore obliged to perform a final reconciliation as at the PPE. This is the submission that Arden LJ accepted at para 142 of her judgment. Lord Walker and Lord Hope accept this submission, but only so as to take account of events during the gap period between the PLS and the PPE. I agree with them, but am inclined to think that there is no good reason why the final reconciliation should be limited in the way that they suggest. There is nothing in the language of 7.6 which supports such a limitation. Since (as I have held) all client money is held by the firm on trust for the purpose of distribution in accordance with the distribution rules, if it were necessary to decide the point, I would hold that the final reconciliation should not be limited to an examination of what has happened between the PLS and the PPE. Overall conclusion 169. I would, therefore, dismiss this appeal. I would hold that (i) client money is held on the statutory trust imposed by CASS 7.7. from the time of receipt by a firm; (ii) the money treated as pooled at the PPE should be distributed to clients in accordance with their respective client money entitlements under CASS 7 construed in accordance with this judgment; and (iii) the pooling at the PPE includes all client money identifiable in any account of LBIE into which client money has been received and is not limited to client money in the firm s segregated accounts. If the implications of these holdings call for further decision, application should be made to Briggs J for directions. LORD COLLINS 170. The issues on this appeal are of great importance to financial institutions and regulatory authorities, and the amount of money involved is enormous. They raise some difficult questions of construction of CASS 7 in accordance with settled principles, but not points of law of general importance. Two of these questions have divided the courts below and the members of this court I agree with the judgments of Lord Walker and Lord Hope on the first issue, and those of Lord Dyson and Lord Clarke (and with the conclusions of Lord Neuberger MR, Arden LJ, and Sir Mark Waller in the Court of Appeal) on the second and third issues. Page 66

207 172. I begin with my views on the first issue, namely whether the statutory trust over client money contained in CASS 7.7 attaches only to client money in segregated accounts or whether it also extends to client money which LBIE was entitled to, and did, pay or receive into its own house accounts. The question is whether the statutory trust over clients funds arises on receipt of the funds, as CASS 7.7.2R seems to say ( A firm receives and holds client money as trustee ) and as Briggs J and the Court of Appeal decided, or whether it arises only when the money is received and segregated Recital 26 of the Markets in Financial Instruments Directive 2004/39/EC ( MiFID ) recites that In order to protect an investor s ownership and other similar rights in respect of securities and his rights in respect of funds entrusted to a firm those rights should in particular be kept distinct from those of the firm, Article 13(8) of MiFID provides: An investment firm shall, when holding funds belonging to clients, make adequate arrangements to safeguard the clients' rights and, except in the case of credit institutions, prevent the use of client funds for its own account Article 16(1) of Commission Directive 2006/73/EC ( the Implementing Directive ) provides that: Member states shall require that, for the purposes of safeguarding clients rights in relation to financial instruments and funds belonging to them, investment firms comply with the following requirements (e) they must take the necessary steps to ensure that client funds deposited, in accordance with article 18, in a central bank, a credit institution are held in an account or accounts identified separately from any accounts used to hold funds belonging to the investment firm; (f) they must introduce adequate organisational arrangements to minimise the risk of loss or diminution of client assets, or of rights in Page 67

208 connection with those assets, as a result of misuse of assets, fraud, poor administration, inadequate record-keeping or negligence. and article 16(2) provides: If, for reasons of the applicable law, including in particular the law relating to property or insolvency, the arrangements made by investment firms in compliance with paragraph 1 to safeguard clients rights are not sufficient to satisfy the requirements of article 13(7) and (8) of [MiFID], member states shall prescribe the measures that investment firms must take in order to comply with those obligations Section 139(1)(a) of the Financial Services and Markets Act 2000 ( FSMA ) provides for rules to make provision which results in clients money being held on trust in accordance with the rules CASS 7.3 (Organisational requirements: client money) provides: Requirement to protect client money 7.3.1R A firm must, when holding client money, make adequate arrangements to safeguard the client's rights and prevent the use of client money for its own account. [Note: article 13(8) of MiFID] Requirement to have adequate organisational arrangements 7.3.2R A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client money, or of rights in connection with client money, as a result of misuse of client money, fraud, poor administration, inadequate record-keeping or negligence. [Note: article 16(1)(f) of the MiFID implementing Directive] 178. CASS 7.2.1R defined client money as any money that a firm receives from or holds for, or on behalf of, a client... Page 68

209 179. CASS 7.7 (Statutory trust) provides (omitting the special provisions for insurance undertakings): 7.7.1G Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust. Requirement 7.7.2R A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms: (1) for the purposes of and on the terms of the client money rules and the client money (MiFID business) distribution rules; (2) subject to (3) [an error for (4)], for the clients for whom that money is held, according to their respective interests in it; (4) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and (5) after all valid claims and costs under (2) to (4) have been met, for the firm itself CASS 7.8 requires the trust affecting client money to be notified to and acknowledged by banks and other intermediaries. Where client money is held in a client bank account, the firm is obliged to notify the third party bank that the account is a trust account, and to require from the third party bank an acknowledgment that money standing to the credit of the account is trust money, and that the bank is not entitled to combine the account with any other account or Page 69

210 to exercise any right of set-off or counterclaim against the money in that account: CASS 7.8.1R. The client money rules do not impose any such obligation where client money is held in a house account The essence of the appellants elaborate argument that the enormous sums which Lehman failed to segregate in this case are not subject to the statutory trust comes down to two main points: the first is that as a matter of construction the statutory trust does not arise before segregation. The second, which is put at the forefront of the argument, is that CASS 7 allows client money to be paid into the firm s house accounts under the alternative approach. The essential feature of a trust is that the trustee must deal with the trust property solely for the purposes of the trust. Under the alternative approach the firm is free to use the client money paid into its house accounts for its own purposes, and that is inconsistent with an intention that such funds are held on trust for others The first argument, on the construction of the wording, is that the opening words of CASS 7.7.2R ( A firm receives and holds client money as trustee on the following terms ) do not show that the trust was intended to apply to all client money from the moment of its receipt by the firm. The use of the phrase receives and holds is explained by the fact that it tracks the definition of client money in CASS 7.2.1R, being any money that a firm receives from or holds for, or on behalf of, a client, which reflects the fact that the firm may come under an obligation to treat money as client money in two separate circumstances: (1) where it receives money from or on behalf of a client; and (2) where, as a result of a transaction involving a client, the firm is obliged to segregate some of its own money into a client bank account as client money. There is nothing in MiFID in general, or in article 13(8) of MiFID or article 16(1) and (2) of the Implementing Directive or in CASS 7.3 in particular, which requires a trust to be imposed from the moment of receipt The second argument is essentially that the use of the alternative approach by investment firms such as LBIE operating in a complex environment is inconsistent with the imposition of a trust on receipt. In practice it is impossible in such an environment for the firm to keep track, on a real-time basis, of the extent to which each trade, or movement in the market, or payment relating to a particular client gives rise to a requirement to make a payment into or out of the segregated client bank accounts (as required by the normal approach). As a result, with auditor certification, the firm is permitted to receive client money from or on behalf of clients into its own accounts, and to pay any money to or on behalf of clients out of its own accounts. The firm is required to maintain in the client bank accounts an amount equal to the aggregate amount of client money it is required to hold for clients (less the amount held in the client transaction accounts). Since it is impossible to achieve this on a real-time basis, an adjustment is required to be done daily, by performing a reconciliation of records and accounts required under Page 70

211 CASS 7.6.2R, and adjusting the balance held in its client bank accounts to accord with that reconciliation, until the process is repeated on the next business day. The firm is under no obligation in relation to the actual money received as client money; but it is obliged to make payments to or on behalf of clients out of the funds in its own accounts (ie its own funds), and permitted to receive client money into its own accounts. It must, on a daily basis, ensure that there is sufficient money in the segregated accounts to satisfy the client money requirement as at the close of business on the previous business day. If necessary, this will involve a payment from the firm s own accounts into the client bank accounts, but it may instead involve a withdrawal from the client bank accounts, or no change to the aggregate balance in the client bank accounts The appellants say that under the alternative approach the firm is free to use the client money paid into its house accounts for its own purposes, and that is inconsistent with an intention that such funds are held on trust for others: Henry v Hammond [1913] 1 KB 515, 521; Paragon Finance Plc v DB Thakerar & Co (a firm) [1999] 1 All ER 400, 416. A trust over client money in the firm s house accounts would create practical problems which the draftsman cannot have intended. It is in practice impossible for the firm to monitor, on a real-time basis: (1) the payments made into its house accounts which attract the MiFID client money segregation requirements; (2) the payments which do not; and (3) the payments out of its house accounts which would impact on the application of those requirements. The draftsman must have envisaged that a firm which received client money into its house accounts under the alternative approach would necessarily be unable to distinguish what was client money in each account from its own funds, and would therefore in the ordinary course make payments from its house accounts without differentiating between them In my judgment, the appeal on the first issue fails. That the trust arises on receipt is not only consistent with the objectives of the Directives and the Rules, but also emerges clearly from the wording of CASS 7.7.2R in its context The statutory trust to safeguard clients funds pre-dates MiFID. It has its origin in section 55(2)(a) of the Financial Services Act In his report Review of Investor Protection, Report: Part 1 (1984) (Cmnd 9125) (which preceded the Financial Services Act), para 6.31, Professor Gower noted that under English law mere segregation of funds was not enough to protect those funds from the firm s creditors in the event of its insolvency, and investors money could be safeguarded by segregation only if it was segregated in such a way that ownership remained with them, ie under a trust: The ultimate safeguard for investors is an assurance that on the failure of the investment business such of their money or investments Page 71

212 as have not been disposed of in the legitimate conduct of that business are recoverable by them. In most cases this can be achieved only by a combination of two methods. The first is by the segregation of clients money and investments from the firm s money and investments. This is effective only if clients money and investments are segregated in such a way that ownership remains with them. This is not achieved merely by holding their money in a designated clients account. Unless that account is held on trust for the clients it will not afford protection, as many clients of recently liquidated investment managers and commodity dealers have learnt to their cost In its 2000 consultation paper, Protecting Client Money on the failure of an authorised firm, para. 4.13, the FSA said: All consumers have an interest in the system of regulatory protection that safeguards client money held by a firm. When a firm fails, its clients will want to know that their money can be returned to them as quickly as possible. When it amended the client money rules to take account of the Directives, the FSA retained the existing trust mechanism. In its consultation paper 06/14, Implementing MiFID for Firms and Markets (July 2006) at para it said: MiFID s segregation provisions require a firm, on receiving any client funds, promptly to segregate those funds in an account or accounts identified separately from any accounts used to hold funds belonging to the investment firm. Our view is that under English law, a trust is the most appropriate mechanism for segregating client money and a statutory trust has advantages over a private law trust. For example, the incorporation of the client money distribution rules into the statutory trust assists in the efficient and prompt distribution of client money The FSA proposed (para 10.18): to use the existing requirements concerning the establishment of the statutory trust and the segregation and operation of client money accounts. This will provide certainty as to beneficial ownership and the authority of the firm. And it would preserve the solid foundation for action by us, or liquidators or other persons appointed on their behalf, in the event of firm default A statutory trust does not necessarily bear all the indicia of a trust as would be recognised by a Court of Chancery. Thus in Ayerst v C&K (Construction) Ltd Page 72

213 [1976] AC 167, 180, Lord Diplock said (in the context of a trust arising on insolvency) that all that might be meant by the use of the word trust was giving property the essential characteristic which distinguishes trust property from other property; namely, it cannot be used or disposed of by the legal owner for his own benefit but must be used or disposed of for the benefit of others. Thus CASS 7.7.1G provides that the statutory trust creates a relationship under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. Consequently, it does not follow that, when the word trust is used, that brings with it the full range of trust indicia associated with a traditional private law trust, particularly so when the trust is imposed by statute and is in the context of the exercise of a public function: cf In re Ahmed & Co [2006] EWHC 480 (Ch); 8 ITELR The starting point on issue 1 is the wording of CASS 7.7.2R, which expressly provides that [a] firm receives and holds client money as trustee on the following terms. There is nothing to suggest that the trust does not arise on receipt. Other provisions of CASS 7 are consistent with the conclusion that a firm which receives client money is under an immediate fiduciary duty, including (1) the definition of client money in CASS 7.2.1R which refers to a firm receiving or holding money; (2) CASS R, which provides for the limited situations in which client money is released from fiduciary obligations on the part of the firm, and (3) CASS G (Mixed remittance), which provides that pursuant to the client money segregation requirements, a firm operating the normal approach which receives a mixed remittance (part client money and part other money) must pay the full sum into a client bank account promptly, and in any event, no later than the next business day after receipt; and pay the money that is not client money out of the client bank account promptly, and in any event, no later than one business day of the day on which the firm would normally expect the remittance to be cleared That conclusion is also inevitable in the light of the requirement in article 13(8) of MiFID, which obliges member states to require an investment firm when holding funds belonging to clients to prevent the use of client funds for its own account. CASS 7 must be construed in order to comply with that requirement. It is also supported by articles 16(1) and 16(2) of the Implementing Directive, and by CASS 7.3. Article 16(1) of the Implementing Directive provides that client funds are to be held in accounts separate from the firm s funds, and that firms must introduce adequate organisational arrangements to minimise the risk of loss or diminution of client assets, as a result of (inter alia) the misuse of assets. Most important, if because of insolvency law the arrangements are not sufficient to safeguard clients rights, member states have to prescribe the measures that investment firms must take in order to comply with those obligations: article 16(2). CASS 7.3.1R provides that the firm must prevent the use of client money for its own account. Page 73

214 192. I accept the respondents argument that if the trust did not arise until segregation, then whether or not clients are protected by the CASS rules would become arbitrary and dependent on the firm s own practices: the greater the level of incompetence (or misconduct) on the part of the failed firm, the lesser the protection for clients As for the arguments based on the use of the alternative approach, the starting point is that the alternative approach is merely a method which firms are entitled to adopt, in certain circumstances, if to do so would achieve the client protection objective. The alternative approach is not expressly contemplated by MiFID and is an option permitted only if the firm has in place systems and controls which are adequate to enable it to operate the alternative approach effectively: CASS R The alternative approach does not, and cannot, assist in the interpretation of the Directives, nor does it help in the interpretation of CASS 7.7.2R. I agree with Briggs J (at [144]) that since the purpose of the statutory trust is to protect client money from misuse, it would be odd if client money (originally the client's beneficial property) ceased to be the client's property upon receipt by the firm, and it (or substitute money) then became the client s property again upon segregation shortly thereafter. There is no doubt that money in a mixed fund may be held on trust, and that a trust of money can be created without an obligation to keep it in a separate account: In re Kayford Ltd [1975] 1 WLR 279, 282, per Megarry J. The supposed difficulties in operating the alternative method if there were a continuing trust of client money are in my judgment of no substance, and in any event irrelevant to the question whether the trust arises on receipt For those reasons I would uphold the conclusions of Briggs J and the Court of Appeal [2011] Bus LR 277 on the first issue I add only a few words about the third issue. Lord Walker and Lord Dyson have between them set out fully all of the textual and policy considerations which divide them. My principal reasons for coming to the conclusion that the claims basis is the right basis (as does Lord Dyson, and as did Lord Neuberger MR, Arden LJ and Sir Mark Waller in the Court of Appeal) are these: (a) although CASS 7 uses trust concepts, it is not intended to codify, or be limited by, the ordinary rules of trust law; (b) the exercise is purely one of construction of CASS 7; (c) CASS 7.7.2R provides that the trust is for the purposes and on the terms of the client money rules and the distribution rules; (d) CASS 7.9.6R provides that, on a primary pooling event, client money held in each client money account of the firm is treated as pooled; and the firm must distribute that client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7R; (e) Page 74

215 client money entitlement is a reference to the contractual entitlement to have money segregated for the client; (f) that interpretation better serves the purposes of MiFID and the Rules. Page 75

216 676 [COURT OF APPEAL] The Weekly Law Reports, July 2, 1976 [1976] A * ALUMINIUM INDUSTRIE VAASSEN B.V. v. ROMALPA ALUMINIUM LTD. [1974 A. No. 5671] B 1975 Feb. 3, 4, 5, 6, 7; 11 Mocatta J Jan. 13, 14, 15, 16 Megaw, Roskill and Goff L.JJ. Sale of Goods Implied term Obligation to account Conditions of sale containing reservation of ownership clause Property not to pass to buyers until all outstanding debts paid Goods sold to sub-purchasers Buyers in liquidation Proceeds of sub-sales held in receiver's account Whether sellers entitled to trace and recover Between September 1973 and October 1974 the plaintiffs, a Dutch company, sold to the defendants, an English company, aluminium foil, some of which the defendants re-sold to third j-) parties. The plaintiffs' general selling terms and conditions, which the court found applied to all transactions between the parties, stipulated by clause 13 that " the ownership of the material to be delivered... will only be transferred to the purchaser when he has met all that is owing to " the plaintiffs. The clause went on to refer to articles manufactured by the defendants from material supplied by the plaintiffs and provided that ownership of such articles would be given to the c plaintiffs as " surety " of full payment of what the defendants owed them, that the defendants would keep such articles in their capacity of fiduciary owners, but they were given power to sell such articles to third parties in the normal course of their business. The defendants went into liquidation owing the plaintiffs over 122,000, and the receiver certified that 35,152 was held in an account in his name with the defendants' bankers, representing the proceeds of sale of aluminium p foil supplied by the plaintiffs which the defendants had sold to third parties. The plaintiffs claimed, inter alia, a declaration that they were entitled to a charge on the money held in the receiver's account and to trace the proceeds of sub-sales of their property in that account. The defendants conceded that the effect of clause 13 was to make them bailees of the material supplied by the plaintiffs until all debts were paid, but con- Q tended that once they had re-sold the material to bona fide purchasers the relationship between them and the plaintiffs was purely that of debtor and creditor and that, in the absence of an express or constructive trust, the plaintiffs were not entitled to avail themselves of the equitable remedy of tracing the money. Mocatta J. held that clause 13 showed an intention to create a fiduciary relationship between the parties and that the plaintiffs were entitled to follow the proceeds of the u sub-sales. On appeal by the defendants: Held, dismissing the appeal, that the obvious purpose of clause 13, in the context of the general conditions, was to secure the plaintiffs as far as possible, in the event of insolvency, against the risk of non-payment after they had parted with possession of but not the legal title to the material delivered, whether or not that material retained its identity before payment was received, and that, in order to give effect Q

217 A B The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) to that purpose, there had to be implied into the first part of the clause, in addition to the undoubted power to sell the material to sub-purchasers, an obligation on the defendants to account in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee, as expressly contemplated in the second part of the clause; and accordingly the plaintiffs were entitled to trace the proceeds of the subsales, and to recover them and the judge had correctly so held (post, pp. 668B-C, 690A-B, E-F, 692A-C, 693B-C, 694A-B). In re Halletfs Estate (1880) 13 Ch.D. 696, C.A. applied. Decision of Mocatta J., post, pp. 678E et seq.; affirmed. 677 C D The following case is referred to in the judgment of the Court of Appeal: Halletfs Estate, In re [1976] 2 All E.R. 552 (1880) 13 Ch.D. 696, C.A. No additional cases were cited in argument. The following cases are referred to in the judgment of Mocatta J.: Diplock, In re [1948] Ch. 465, C.A. Halletfs Estate, In re (1880) 13 Ch.D. 696, C.A. Henry v. Hammond [1913] 2 K.B. 515, D.C. King v. Hutton [1900] 2 Q.B. 504, C.A. E The following additional cases were cited in argument before Mocatta J.: Alison (J. Gordon) and Co. Ltd. v. Wallsend Slipway and Engineering Co. Ltd. (1927) 43 T.L.R. 323, C.A. Bolton (H. L.) Engineering Co. Ltd. v. T. J. Graham & Sons Ltd. [1957] 1 Q.B. 159; [1956] 3 W.L.R. 804; [1956] 3 All E.R. 624, C.A. Curtis v. Chemical Cleaning and Dyeing Co. Ltd. [1951] 1 K.B. 805; [1951] 1 All E.R. 631, C.A. Hardwick Game Farm v. Suffolk Agricultural Poultry Producers Association [1969] 2 A.C. 31; [1968] 3 W.L.R. 110; [1968] 2 All E.R. 444, H.L.(E.). Ladenburg & Co. v. Goodwin, Ferreira & Co. Ltd. [1912] 3 K.B F McCutcheon v. David Macbrayne Ltd. [1964] 1 W.L.R. 125; [1964] 1 * All E.R. 430, H.L.(Sc). McEntire v. Crossley Brothers Ltd. [1895] 1 A.C. 457, H.L.(L). Thornton v. Shoe Lane Parking Ltd. [1971] 2 Q.B. 163; [1971] 2 W.L.R. 585; [1971] 1 All E.R. 686, C.A. Tunstall v. Steigmann [1962] 2 Q.B. 593; [1962] 2 W.L.R. 1045; [1962] 2 All E.R. 517, C.A. Underwood (A. L.) Ltd. v. Bank of Liverpool and Martins [1924] 1 K.B. G 775, C.A. ACTION By a specially indorsed writ dated October 30, 1974, and re-amended points of claim dated January 24, 1975, the plaintiffs, Aluminium Industrie Vaassen B.V., a company incorporated under the laws of the H Kingdom of Holland and carrying on business as manufacturers and suppliers of aluminium goods, claimed, inter alia, a declaration that all goods at any time supplied by them to the defendants, Romalpa Aluminium Ltd., an English company, were the property of the plaintiffs, except in so far as title to the goods might have passed pursuant to section 25 of the Sale of Goods Act 1893 to bona fide purchasers for value from the defendants; an order that the defendants deliver up to the plaintiffs all goods supplied by the plaintiffs and in the actual or

218 678 The Weekly Law Reports, July 2, 1976 Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) [1976] constructive possession or control of the defendants; an order restraining A the defendants from parting with possession of such goods; a declaration that the plaintiffs had a charge to the extent of 35, over the account of the defendants' receiver/manager with the defendants' bankers, Hume Corporation Ltd., and an order that such sum be paid over to the plaintiffs; the price of goods supplied to the defendants but not paid, namely, 122,239. They relied on General Selling Terms and Conditions for Foil Aluminium which they alleged applied to every transaction between themselves and the defendants and in particular on clause 13 which provided: " The ownership of the material to be delivered by [the plaintiffs] will only be transferred to the purchaser when he has met all that is owing to [the plaintiffs], no matter on what grounds..." ^ By their amended defence the defendants, inter alia, denied that the general selling terms and conditions applied to the transactions between them and the plaintiffs, or that the plaintiffs remained the owners of the goods other than those sold to bona fide purchasers for value or that the plaintiffs were entitled to any of the relief sought in the writ ~ and the prayer in the re-amended points of claim. The facts relevant to this report are stated in the judgment of Mocatta J. and of Roskill L.J. Anthony Lincoln Q.C. and David Donaldson for the plaintiffs. M. A. Pickering for the defendants. Cur. adv. vult. E February 11, MOCATTA J. read the following judgment. The plaintiffs are a Dutch company making, amongst other things, aluminium foil. The defendants are an English company in respect of which its bankers, Hume Corporation Ltd., on November 1, 1974, appointed a receiver pursuant to powers granted by the defendants under a debenture F dated January 10, On October 30, 1974, just before the appointment of the receiver, a writ had been issued in this action by the plaintiffs, and an interlocutory injunction was obtained on October 30 from Cusack J. in relation to goods supplied by the plaintiffs to the defendants and still in the possession of the defendants. There is no doubt that on November 1, 1974, the defendants owed the _ plaintiffs Hfl. 757,886, or 122, at the rate of exchange of Hfl [Dutch Florins] to the, in respect of a large number of invoices in relation to sales of aluminium foil to the defendants from August 1, After his appointment, the receiver certified that 35, was held in an account in his name as receiver-manager of the defendants with the Hume Corporation, and that amount represented the proceeds of sale of aluminium foil supplied by the plaintiffs to the defendants and H then sold by the latter to third parties. In this action the plaintiffs now seek to establish by declaration their right to a charge on this sum, basing their claim on a right to trace on the principle established in In re Hallett's Estate (1880) 13 Ch.D Secondly, the receiver has certified that aluminium foil to a value alleged to be 50,235 is held by him, having originated in deliveries to the defendants by the plaintiffs. The plaintiffs seek a second relief,

219 The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) Mocatta J. A namely, a declaration that this quantity of foil is theirs, and an order for its delivery up. Very much as a third string to their claim and only if they should fail on their first and second claims to relief, the plaintiffs sought judgment for the price. The first major issue in this case turns on whether clause 13, in what the plaintiffs say are their general selling terms and conditions for aluminium foil, applied to the transactions done between the plaintiffs " and the defendants, in respect of which 122,239 is owing. That clause began with this important reservation of title. The first sentence of the clause reads as follows: " The ownership of the material to be delivered by A.I.V." (that is the plaintiffs) "will only be transferred to purchaser when he has met all that is owing to A.I.V., no matter on what grounds." Q I read the remainder of the clause in view of its somewhat elaborate nature and of subsequent issues arising: " Until the date of payment, purchaser, if A.I.V. so desires, is required to store this material in such a way that it is clearly the property of A.I.V. A.I.V. and purchaser agree that, if purchaser should make (a) new object(s) from the material, mix this material with (an)other object(s) or if this material in any way whatsoever becomes a constituent of (an)other object(s) A.I.V. will be given the ownership of this (these) new objects(s) as surety of the full payment of what purchaser owes A.I.V. To this end A.I.V. and purchaser now agree that the ownership of the article(s) in question, whether finished or not, are to be transferred to A.I.V. and that this E transfer of ownership will be considered to have taken place through and at the moment of the single operation or event by which the material is converted into (a) new object(s), or is mixed with or becomes a constituent of (an)other object(s). Until the moment of full payment of what purchaser owes A.I.V. purchaser shall keep p the object(s) in question for A.I.V. in his capacity of fiduciary owner and, if required, shall store this (these) object(s) in such a way that it (they) can be recognized as such. Nevertheless, purchaser will be entitled to sell these objects to a third party within the framework of the normal carrying on of his business and to deliver them on condition that if A.I.V. so requires purchaser, as long as he has not fully discharged his debt to A.I.V. shall hand over to A.I.V. the claims he has against his buyer emanating from this transaction." If the plaintiffs can establish that clause 13 does apply, as between themselves and the defendants, they are admittedly entitled to succeed on their second claim, the goods in question in the possession of the defendants still being their property. But their first claim, namely, the right to trace, is disputed. I must therefore deal first with the hotly contested point whether clause 13 did apply between the plaintiffs and H the defendants. The plaintiffs say it did, expressly, or impliedly. The defendants say that it did apply admittedly to trade that had been carried on between the plaintiffs and a firm called Romalpa Aluminium, prior to the plaintiffs beginning to do business with the defendants on September 1, They deny, however, that the clause applied to business done between the plaintiffs and the defendants from that date onwards. [His Lordship narrated the course of dealing between the plaintiffs and the partnership and referred to the agreement by the two partners, 679

220 680 The Weekly Law Reports, July 2, 1976 Mocatta J. Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) [1976] Mr. Rodbard and Mr. Malyon, that the plaintiffs' general selling terms A and conditions, which had been deposited in all the district courts of the Netherlands, should apply to all transactions between the plaintiffs and the partnership, including the ownership clause, clause 13. He said that after the defendants acquired the business of the partnership in September 1973 and the two partners became directors, orders were placed as before, and confirmations and acknowledgments were given to the defendants as before and on exactly the same printed forms as had been in use between the plaintiffs and the partnership since In his Lordship's judgment it followed from the facts that the full deposited terms, including clause 13, did apply to every order placed by the defendants with the plaintiffs; that there was an express incorporation of clause 13 in the various contracts made between the parties. If there were any doubt about that, the full terms, including clause 13, were impliedly agreed to apply to C each order. His Lordship continued: ] Having decided that clause 13 did apply to the many transactions between the plaintiffs and defendants after September 1, 1973, when the defendants took over the aluminium foil business that the partnership had previously conducted with the plaintiffs, I now have to deal with the consequences of that decision as applying to the claims in the action. ^ In the first place, it is admitted that the plaintiffs are the owners of the remaining unsold aluminium foil held by the receiver, and that they are entitled to an order for its delivery up to them. The real contest arose in relation to the plaintiffs' right to a charge on the receiver's account with the Hume Corporation to the extent of 35, representing, as certified by the receiver, the sum recovered by him from customers of the defendants as a result of A.I.V. materials supplied to E the defendants by the plaintiffs. This right the plaintiffs claim on the basis of the principle established in In re Hallett's Estate, 13 Ch.D. 696 entitling them to trace the proceeds of the sale of their property sold by the plaintiffs into the receiver's bank account. It is common ground that the effect of clause 13 is that, while money was owing by the defendants to the plaintiffs, any aluminium foil delivered by the plaintiffs p to the defendants, while still in their possession, was held by them as bailees. It is further common ground that the clause must be read subject to the necessary implication that the defendants were entitled to sell the foil to sub-purchasers. It is curious that this is not said about sales of unmixed foil whilst it is said in the last sentence of the clause about foil mixed with other material. In respect of this, it is to be noted that the defendants were, if required, to assign to the plaintiffs their rights against sub-purchasers in respect of the mixed materials sold to them. Notwithstanding the generally far-reaching and somewhat elaborate provisions in clause 13, reserving the plaintiff's right of ownership in the goods until nothing was owing from the purchasers, and the admission that the clause had the effect of making the defendants bailees of the goods while H in their possession until all money owing had been paid, the argument for the defendants was that once foil had been sold to bona fide purchasers, the relationship between the plaintiffs and the defendants was purely one of debtor and creditor. As against this, the plaintiffs argued that a fiduciary relationship stemming from the bailment continued after sales to third parties, and that in consequence equitable remedies applied, including the right to trace proceeds of the sub-sales. It was not

221 D H The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) Mocatta J. necessary, said the plaintiffs, to find as a prerequisite to the right to trace an express or constructive trust. The equitable proprietary remedy followed as a consequence of the finding that the defendants were bailees. Having indicated the general nature of the competing arguments, I can go straight to the judgment of Sir George Jessel M.R. in In re Hallett's Estate, 13 Ch.D Although in that case there had been breaches of express trust, it is clear from the passages I am about to read that the reasoning was not founded on this, and that the principle stated applied to much wider circumstances. It is necessary to make certain fairly extensive quotations. Sir George Jessel M.R. said, at p. 708: " The modern doctrine of equity as regards property disposed of by persons in a fiduciary position is a very clear and well-established doctrine. You can, if the sale was rightful, take the proceeds of the sale, if you can identify them. If the sale was wrongful, you can still take the proceeds of the sale, in a sense adopting the sale for the purpose of taking the proceeds, if you can identify them. There is no distinction, therefore, between a rightful and a wrongful disposition of the property, so far as regards the right of the beneficial owner to follow the proceeds...." Pausing there for a moment, it is not, of course, suggested here that there was a wrongful disposition of the plaintiff's property when the defendants sold the foil to bona fide sub-purchasers. The latter would get a good title pursuant to section 25 of the Sale of Goods Act As between the plaintiffs and defendants, however, property had never passed to the defendants. I continue with the quotation, at p. 709: " But it very often happens that you cannot identify the proceeds. The proceeds may have been invested together with money belonging to the person in a fiduciary position, in a purchase. He may have bought land with it, for instance, or he may have bought chattels with it. Now, what is the position of the beneficial owner as regards such purchases? I will, first of all, take his position when the purchase is clearly made with what I will call, for shortness, the trust money, although it is not confined, as I will shew presently, to express trusts. In that case, according to the now well-established doctrine of equity, the beneficial owner has a right to elect either to take the property purchased, or to hold it as a security for the amount of the trust money laid out in the purchase; or, as we generally express it, he is entitled at his election either to take the property, or to have a charge on the property for the amount of the trust money. But in the second case, where a trustee has mixed the money with his own, there is this distinction, that the cestui que trust, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee. The moment you get a substantial portion of it furnished by the trustee, using the word ' trustee' in the sense I have mentioned, as including all persons in a fiduciary relation, the right to the charge follows. That is the modern doctrine of equity..." VOL (1) 681

222 682 The Weekly Law Reports, July 2, 1976 Mocatta J. Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) [1976] There then follows this passage showing the width of the application of A the principle: " Has it ever been suggested, until very recently, that there is any distinction between an express trustee, or an agent, or a bailee, or a collector of rents, or anybody else in a fiduciary position? I have never heard, until quite recently, such a distinction suggested. It cannot, as far as I am aware (and since this court sat last to hear g this case, I have taken the trouble to look for authority), be found in any reported case even suggested, except in the recent decision of Fry J. [Ex parte Dale & Co. (1879) 11 Ch.D. 772,] to which I shall draw attention presently. It can have no foundation in principle, because the beneficial ownership is the same, wherever the legal ownership may be." There is the following short passage, at p. 710: " Now that being the established doctrine of equity on this point, I will take the case of the pure bailee. If the bailee sells the goods bailed, the bailor can in equity follow the proceeds, and can follow the proceeds wherever they can be distinguished, either being actually kept separate, or being mixed up with other moneys." Finally, this sentence, at p. 711 : " Therefore, there is no difficulty in following out the rules of equity and deciding that in a case of a mere bailee, as Fry J. has decided, you can follow the money." These passages are clearly most apposite, since they refer to the position E of a mere bailee, and were strongly relied upon by Mr. Lincoln. Mr. Pickering sought to avoid them by saying that they were obiter or had in some way been modified in In re Diplock [1948] Ch. 465 and that it was necessary that there should be some express or constructive trust before the equitable doctrine could apply. My attention was not drawn to any passage in In re Diplock criticising or modifying, in any way, p. the statements of principle which I have quoted. Although I fully recognise that in considering this problem I find myself in a most unfamiliar field, I feel it my duty to follow and apply those statements. Mr. Pickering drew my attention to two authorities as illustrating the simple debtor/creditor relationship, namely, King v. Hutton [1900] 2 Q.B. 504 and Henry v. Hammond [1913] 2 K.B It is unnecessary to refer to these in detail, save to say that the former makes it clear G- that the special facts of each case are crucial in determining whether there is a simple debtor/creditor relationship, although the intention of the parties as ascertained from the terms of their contract shows that some kind of fiduciary relationship exists. The preservation of ownership clause contains unusual and fairly elaborate provisions departing substantially from the debtor/creditor relationship and shows, in my ^ view, the intention to create a fiduciary relationship to which the principle stated in In re Hallett's Estate, 13 Ch.D. 696 applies. A further point made by Mr. Pickering was that if the plaintiffs were to succeed in their tracing claim this would, in effect, be a method available against a liquidator to a creditor of avoiding the provisions establishing the need to register charges on book debts: see section 95 (1) (2) (e) of the Companies Act He used this only as an argument against the D

223 The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (Q.B.D.) Mocatta J. A effect of clause 13 contended for by Mr. Lincoln. As to this, I think Mr. Lincoln's answer was well founded, namely, that if property in the foil never passed to the defendants with the result that the proceeds of sub-sales belonged in equity to the plaintiffs, section 95 (1) had no application. The plaintiffs accordingly succeed and are entitled to the reliefs sought in paragraph 1 of the prayer, to the reliefs sought in paragraphs 2 and 3 of the prayer; and also to a declaration that they have a charge to the extent of 35, over the account of the receiver-manager of the defendants, with Hume Corporation Ltd., and an order that he pay over that sum to the plaintiffs' solicitors. Their claim for the price of goods sold is adjourned sine die with liberty to apply. It will only become relevant in the event of my decision being reversed in a higher C court. Judgment for plaintiffs with costs. Solicitors: Woodham Smith, Greenwood & Holland; Theodore Goddard & Co. The defendants appealed on the grounds, inter alia, that the judge had erred in fact or in law or in principle: (1) in holding that clause 13 of the General Selling Terms and Conditions applied to or were incorporated in contracts for the sale of aluminium foil made between the plaintiffs and the defendants; (2) in holding that the plaintiffs were entitled at law to trace sums of money received by the defendants as proceeds of sale for aluminium foil; and (3) in failing to formulate and E apply correctly the relevant ratio decidendi in In re Hallett's Estate, 13 Ch.D. 696 and other cases to the facts of the present case. Their Lordships dismissed the appeal on the first ground which does not call for report. 683 P Leolin Price Q.C. and M. A. Pickering for the defendants. Anthony Lincoln Q.C. and David Donaldson for the plaintiffs. MEGAW L.J. I shall ask Roskill L.J. to deliver the first judgment. ROSKILL L.J. This appeal, from a judgment of Mocatta J. dated February 11, 1975, arises out of a dispute between the plaintiffs, a Dutch company, who amongst other things manufacture aluminium foil in G Holland, and the defendants, an English limited company, regarding entitlement, first to certain quantities of aluminium foil admitted to be physically in the defendants' possession and secondly to certain proceeds of sale of other aluminium foil delivered to the defendants by the plaintiffs and sold by the defendants to sub-purchasers in this country for which those sub-purchasers had paid the defendants but for which H the defendants had not paid the plaintiffs by the time the defendants whose business has been in the hands of a receiver since November 1, 1974 got into the serious financial difficulties which led to that receiver being so appointed. At that date the defendants were indebted to the plaintiffs for over 122,000. The value of the foil concerned in the first head of claim is said to be just over 50,000. The sum involved in the second head of claim is just over 35,000. The present action is thus an attempt by the VOL (2)

224 684 The Weekly Law Reports, July 2, 1976 Koskill L.J. Aluminium Industrie B.Y. v. Romalpa Ltd. (C.A.) [1976] plaintiffs to reduce that very substantial loss which they have suffered A in their trading operations with the defendants, albeit at the expense of the debenture holders by whom the receiver was appointed and to whom the defendants remain very heavily indebted in respect of two advances of 100,000 each made to the defendants by the debenture holders. The business which has led to these heavy losses was not always conducted between the defendants and the plaintiffs. Before September 1973, it had been conducted by the plaintiffs with a partnership called Romalpa Aluminium (for brevity I shall call it " the partnership ") the two partners in which became the two principal directors of the defendants, the third director of the defendants being a nominee of the debenture holders who first of all financed the defendants in return initially for the issue of unsecured loan stock and later in return for the debentures which the defendants issued to them. C There is no doubt what the express terms were upon which the plaintiffs did business with the partnership. They did their business upon certain general selling terms and conditions dated February 1971, which were deposited or registered with all district or county courts in Holland. The significance of such deposit, in Dutch law, was not the subject of any evidence; nor does it matter, though it would have been j^ interesting to have known what the position was under Dutch law, as indeed it would have been interesting to know how a Dutch lawyer would have construed some of those express terms. Those conditions were in Dutch, but there was what one might describe as an authentic and specially prepared, though not perhaps very well expressed, English translation of the Dutch conditions. On April 4, 1972, the plaintiffs obtained from the partnership the signature of the two partners on a E copy of that English translation. The conditions were expressed to be subject to Dutch law, the Amsterdam court being given exclusive jurisdiction by clause 30. The relevant conditions for present purposes were clauses 13, 22, 25 and 26. I shall read parts of those later. Thereafter, and until the defendants took over the business with the plaintiffs previously done by the plaintiffs with the partnership, there can be no doubt that that business was done, inter alia, upon those express conditions. Individual invoices covered specific transactions incorporated both in Dutch and in English what was described as an " epitome " of the plaintiffs' general conditions to which I have just referred. One hesitates to criticise such a document, for one knows the difficulties of translation of this type of document from one language to another; but it cannot be said that the English translation is happy. Clause 13 is not referred to in the epitome at all an omission upon which the defendants placed considerable reliance in connection with their submission that though the general conditions had governed the relationship of the plaintiffs with the partnership, they never governed the plaintiffs' relationship with the defendants, notwithstanding that exactly the same printed form of invoice was used for business both with the partnership and with the defendants. It was argued by Mr. Price for the defendants that since the same procedure had not been gone through with the defendants as with the partnership, that is to say, by obtaining the signatures of the defendants' directors on a copy of the conditions, those general conditions did not apply to the transactions between the defendants and the plaintiffs; and p

225 The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) Roskill L.J. A he went on to argue that the knowledge of the partnership was not the knowledge of the defendants even though those two partners were the defendants' two principal directors. The avowed purpose of this argument was to enable the defendants, if they could, to escape, in particular, from the bonds of clause 13 of the general conditions. For, if the defendants were not bound by those R conditions, and in particular by clause 13, the whole of the plaintiffs' claim must fail and Mocatta J.'s judgment would be manifestly wrong. If, however, the defendants were bound by clause 13, it was admitted that, as indeed Mocatta J. held, the plaintiffs must succeed on their first head of claim, though it was strenuously contended on their behalf that, even so, clause 13 did not enable them to succeed on their second head of claim. Indeed before us the major part of the argument was directed C to this latter question which the judge also decided in the plaintiffs' favour. Indeed Mr. Price, if he will forgive my saying so, for reasons which I can well understand and indeed sympathise with, argued the second point first. The opening sentences of clause 13 read: " The ownership of the material to be delivered by A.I.V." those D initials, I should interpose, stand for the plaintiffs " will only be transferred to purchaser when he has met all that is owing to A.I.V., no matter on what grounds. Until the date of payment, purchaser, if A.I.V. so desires, is required to store this material in such a way that it is clearly the property of A.I.V." In argument those first two sentences in clause 13 were referred to E for convenience as the first part of that clause. Following those first two sentences, which only occupy just over four lines of typescript, there are some 20 further lines of small print dealing with, and as I think only with, what were called in argument mixed or manufactured goods, that is to say goods manufactured from the material supplied by the plaintiffs, so that that material thus lost its original identity. p At one stage in his argument Mr. Price submitted that the second part of clause 13 also applied to unmanufactured goods by which I mean goods which remained in the state in which they were delivered to the defendants; but ultimately he did not press this part of his argument rightly, as I think; for it seems to me plain that the two parts of this clause are dealing with separate subject matters, the first part with unmanufactured goods and the second with mixed or manufactured G goods. The second part is, however, relevant, especially in light of the argument which Mr. Price sought and obtained leave yesterday to advance by virtue of his amendment to the notice of appeal which we allowed, for in determining what implication is to be made in the first part of the clause which is the all-important issue in this appeal it is clearly right to look at clause 13 as a whole and not merely at one part H of it. The second part reads: "A.I.V. and purchaser agree that, if purchaser should make (a) new object(s) from the material, mixes this material with (an)other object(s) or if this material in any way whatsoever becomes a constituent of (an)other object(s) A.I.V. will be given the ownership of this (these) new object(s) as surety of the full payment of what purchaser owes A.I.V. To this end A.I.V. and purchaser now agree that the ownership of the article(s) in question, whether finished or 685

226 686 The Weekly Law Reports, July 2, 1976 Roskill LJ. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) [1976] not, are to be transferred to A.I.V. and that this transfer of owner- A ship will be considered to have taken place through and at the moment of the single operation or event by which the material is converted into (a) new object(s), or is mixed with or becomes a constituent of (an)other object(s). Until the moment of full payment of what purchaser owes A.I.V., purchaser shall keep the object(s) in question for A.I.V. in his capacity of fiduciary owner and, if required, shall store this (these) object(s) in such a way that it (they) can be recognised as such. Nevertheless, purchaser will be entitled to sell these objects to a third party within the framework of the normal carrying on of his business and to deliver them on condition that if A.I.V. so requires purchaser, as long as he has not fully discharged his debt to A.I.V. shall hand over to A.I.V. the claims he has against his buyer emanating from this transaction." C Clause 22 reads: " Payment has to be made nett cash by purchaser not later than 14 days after the date of invoice, preferably by payment by transfer to the postal giro or banking account of A.I.V. If required a bill of exchange can be drawn. The place of payment for all deliveries is Vaassen." That was where the plaintiffs carried on their business. " This also holds good when a bill is returned unpaid. In spite of any complaints about flaws in the material delivered, purchaser is obliged to pay the purchase price at the time laid down." The provision regarding 14 days was varied (assuming for the moment that the general conditions applied) in that 75 days' grace was allowed to _ the defendants and not the 14 days for which clause 22 alone provided. While, as I think, one must deal with the question of construction and implication upon the footing that the credit allowed was 75 days, I do not think that that question can be answered differently according to whether the credit period was 14 or 75 days or some other period. Clause 13 appears in the general conditions with clause 22 unvaried. Clause 25 reads: F " Should purchaser remain in default of any payment for which he is liable to A.I.V. which would be the case in exceeding the time within which purchaser should have paid then A.I.V. is entitled to stop all deliveries, irrespective of which contract with purchaser they spring from, and to rescind the contract in question without judicial interposition, all this without prejudicing their right to full G compensation and without prejudicing their right to take back at once from purchaser the material [which], by virtue of what is laid down under 13, is still their property." It is to be noted that the rights given by clause 25 (again assuming that the general conditions apply) are not limited to non-payment of individual debts due under each individual contract evidenced by individual invoices H but apply in the case of default " of any payment" for which the purchaser (that is to say the defendants) is liable to the plaintiffs a fact which I regard as of great importance. Clause 26 gives the plaintiffs an additional right to interest on outstanding invoice debts. I shall deal first (as did the judge) with the question of the alleged incorporation of the general conditions into the transactions with the defendants, it being conceded that those general conditions applied to

227 The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Roma 1 pa Ltd. (C.A.) Roskill L.J. A the antecedent transactions with the partnership. The judge had no difficulty in holding that the business done with the defendants was done on exactly the same terms as the antecedent business with the partnership. [His Lordship said he entirely agreed with Mocatta J.'s conclusion on that matter, and that it was obvious that the defendants' directors, the two ex-partners, knew precisely what the terms of business had been before the defendants came on the scene as a contracting party with the plaintiffs, and what those terms were going to be thereafter, and in fact were at all material times; and that their knowledge, to his Lordship's mind, was manifestly the knowledge of the defendants. He accordingly held that the foil physically held by the receiver was the plaintiffs' foil, to which they were now entitled, and the appeal against that part of Mocatta J.'s judgment must clearly fail. His Lordship continued:] C I turn to the second part, which Mr. Price argued first. Are the plaintiffs entitled to the proceeds of sales to sub-purchasers now held by the receiver? We were told both by Mr. Price and by Mr. Lincoln that the receiver received these moneys after he had entered into his receivership from sales made by the defendants to sub-purchasers before that date. The receiver, properly if I may say so, kept those moneys separate; and we were told that there is no complication arising of those moneys having become mixed with other moneys, because they were always kept separate. There was no suggestion that the sub-sales in question were other than authorised by the plaintiffs or that the subpurchasers concerned did not acquire a valid title to the several quantities of foil which each of them bought. The sole question is whether, on the facts and on the true construction of the bargain, including the E general conditions, between the plaintiffs and the defendants, the plaintiffs are entitled to trace and recover those proceeds of the sub-sales, upon the well-known principles laid down in the judgment of Sir George Jessel M.R. in In re Hallett's Estate (1880) 13 Ch.D Those principles are so well known that it is not necessary to quote the Master of the Rolls' famous judgment or from the various restatements of principle in P the several textbooks to which Mr. Price has referred. The most relevant passages from that judgment will be found in Mocatta J.'s judgment (ante, pp. 681A-B et seq.). The critical question is whether there was a fiduciary relationship between the plaintiffs and the defendants which entitles the plaintiffs successfully to claim these moneys in the way and upon the footing which I have just described. Mr. Price strenuously argued that the G bargain between the parties was a perfectly ordinary bargain, creating the ordinary contractual relationship of seller and buyer, with the consequence that if the buyers that is to say the defendants became insolvent before payment for the goods was made by them to the sellers, that is, the plaintiffs the sellers were left with their ordinary contractual or, as he put it, personal remedy as unsecured creditors of the JJ buyers, and that there was no additional proprietary remedy (again to borrow his language) available to them justifying their seeking to trace and recover the proceeds of the sub-sales which had come from the sub-purchasers into the hands of the receiver. It seems to me clear that, but for the provisions of clause 13 which have to be read in conjunction with the other relevant clauses I have mentioned this would be the position. The individual contracts were for delivery ex the plaintiffs' works in Holland, and, apart from special 687

228 688 The Weekly Law Reports, July 2, 1976 RoskiU L J. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) [1976] provisions, in English law at least as already stated, there is no evidence A of Dutch law and therefore we must apply English law to these contracts both property and risk would have passed to the defendants upon such delivery. But clause 13 plainly provides otherwise. The defendants as sellers were to retain the property in the goods until all and I underline " all" that was owing to them had been paid. It is a curious fact that the ~ first part of clause 13 is so short while the second part is so long and detailed. But, as Mr. Lincoln said, the problems with which the second part had to deal were infinitely more complex than those with which the first part had to deal. It is obvious, to my mind, that the business purpose of the whole of this clause, read in its context in the general conditions, was to secure the plaintiffs, so far as possible, against the risks of non-payment after they had parted with possession of the goods C delivered, whether or not those goods retained their identity after delivery. I unhesitatingly accept that part of Mr. Lincoln's submission. In the case of unmanufactured goods this was to be achieved by the plaintiffs retaining the property until all payments due had been made, to which were added the special rights given by clause 25. In the case of mixed or manufactured goods, more elaborate provisions were madet-v and indeed were obviously required if the avowed object of clause 13 were to be achieved in the case of the latter class of goods. The plaintiffs were to be given the ownership of these mixed or manufactured goods as " surety" for " full payment." " Surety" I think in this context must mean, as Mr. Lincoln contended yesterday, " security." This is as between the defendants and the plaintiffs, and it is not necessary to consider how far this provision would protect the plaintiffs against E adverse claims, at any rate in this country, by third parties. Further, the clause later provides that until " full payment" is made the defendants shall keep the mixed goods for the plaintiffs as " fiduciary owners " not perhaps the happiest of phrases but one which suggests, at least to an English lawyer, that in relation to mixed or manufactured goods there was produced what in English law would be called a fiduciary p relationship in this respect. The clause goes on to give to the defendants an express power of sale of such goods, and the right to deliver them; and adds an obligation upon the defendants, if required by the plaintiffs so to do, to assign (to use English legal language) to the plaintiffs the benefit of any claim against a sub-purchaser so long as the defendants have not fully discharged all their indebtedness to the plaintiffs. For my part I accept that this last-mentioned provision is not itself G an equitable assignment in English law. But I think that Mr. Lincoln is right in his general approach to the construction of the second part of clause 13. Like the first part, it contemplates the resale by the defendants of goods which at the time of such resale were to be the property of the plaintiffs and not of the defendants. The second part of clause 13 clearly contemplates the creation of a fiduciary relationship JJ in relation to mixed goods; and the assignment provisions are, as I think, clearly designed to give the plaintiffs, if they so require, an additional security to recover debts otherwise payable to the defendants but not paid to them by the sub-purchasers, if the defendants have failed to discharge all or any of their current indebtedness to the plaintiffs. The burden of Mr. Lincoln's argument was, first, that all goods dealt with in pursuance of clause 13 were, until all debts were discharged,

229 The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) Roskill LJ. A the plaintiffs' goods which the defendants were authorised to sell on the plaintiffs' behalf and for the plaintiffs' account but only within the framework of clause 13. Since the goods were the plaintiffs', the defendants remained accountable to the plaintiffs for them or for their proceeds of sale, so long as any indebtedness whatever remained outstanding from the defendants to the plaintiffs. Hence the creation of the fiduciary relationship upon which Mr. Lincoln sought to rely. The burden of B Mr. Price's argument was, as already stated, that the clause created in the first part no more than the ordinary debtor/creditor, buyer/seller, relationship, and that nothing in the second part justified placing additional fiduciary obligations upon the defendants in respect of unmanufactured goods, referred to in the first part of the clause. It was common ground at the trial and during argument in this court C that some implication had to be made into the first part of clause 13; since otherwise the defendants could not lawfully sell the unmanufactured goods in their possession, at least until they were paid for for, as already pointed out, they were the plaintiffs' and not the defendants' goods. To hold otherwise, as I think both parties accepted, would be to stultify the whole business purpose of these transactions. What (if any) implication is to be made beyond that? The first part of clause 13 is silent not only as to the power of sale but as to the dealing with any proceeds of the goods lawfully so sold by the defendants. Is the admitted power of sale (if I may respectfully borrow Goff L.J.'s phrase during the argument) fettered or unfettered? If it is fettered, is the fetter that, so long as any indebtedness remained outstanding in any respect from the defendants to the plaintiffs, the defendants after a E sub-sale remained accountable to the plaintiffs for all proceeds of subsales not even, as Mr. Price pointed out in argument, being able to retain for themselves the profit upon any such sales? Mr. Price relied much upon the 75-days' credit though, as I have already ventured to point out, the problem is the same whatever the length of the credit. But the longer the period it can fairly be said P the greater the business, if not the legal, force of this part of Mr. Price's argument. If the plaintiffs were right, Mr. Price argued, then whenever sub-purchasers paid the defendants before the 75 days' credit had expired the defendants could not use those proceeds in their business for any purposes whatever save for paying their creditors, the plaintiffs: they must always retain those proceeds specifically for the plaintiffs' account and pay them over to the plaintiffs unless and until the entirety G of outstanding indebtedness was discharged. This, he said, would deprive the defendants of all day-to-day finance and, so far from according with business efficacy, would produce precisely the opposite result, for it would cause acute cash-flow problems and make conduct of the defendants' business impossible. This is a formidable argument if one looks at the matter solely from the point of view of the defendants. TT But this matter has to be regarded in the light of the contractual provisions agreed upon by both parties, and the question of business efficacy, in relation to which there are here obvious competing business considerations, must be answered in the light of what both parties expressly agreed upon and therefore must be taken also impliedly to have agreed upon, and not unilaterally from the point of view of one party only. Now, the crucial facts to my mind are two: first, that the defendants were selling goods which the plaintiffs owned at all material times; and 689

230 690 The Weekly Law Reports, July 2, 1976 Roskill L.J. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) [1976] secondly, that clause 13 as a whole is obviously designed to protect the ^ plaintiffs, in the event of later insolvency, against the consequences of having parted with possession of, though not with legal title to, these goods before payment was received, 75 days' credit being allowed. When, therefore, one is considering what, if any, additional implication has to be made to the undoubted implied power of sale in the first part of clause 13, one must ask what, if any, additional implication is necessary to make effective the obvious purpose of giving the requisite security to *> the plaintiffs? One is, I think, entitled to look at the second part of clause 13 to answer this; for it would be strange if the first part were to afford no relevant security when the second part is (as I think) elaborately drawn to give such security in relation to manufactured or mixed goods. I see no difficulty in the contractual concept that, as between the defendants and their sub-purchasers, the defendants sold as principals, but c that, as between themselves and the plaintiffs, those goods which they were selling as principals within their implied authority from the plaintiffs were the plaintiffs' goods which they were selling as agents for the plaintiffs to whom they remained fully accountable. If an agent lawfully sells his principal's goods, he stands in a fiduciary relationship to his principal and remains accountable to his principal for those goods and their proceeds. A bailee is in like position in relation to his bailor's goods. What, then, is there here to relieve the defendants from their obligation to account to the plaintiffs for those goods of the plaintiffs which they lawfully sell to sub-purchasers? The fact that they so sold them as principals does not, as I think, affect their relationship with the plaintiffs; nor (as at present advised) do I think contrary to Mr. Price's argument that the sub-purchasers could on this analysis have sued the E plaintiffs upon the sub-contracts as undisclosed principals for, say, breach of warranty of quality. It seems to me clear (and so far from helping Mr. Price I think the second part of clause 13, properly construed, helps Mr. Lincoln) that to give effect to what I regard as the obvious purpose of clause 13 one must imply into the first part of the clause not only the power to sell p but also the obligation to account in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee. Accordingly, like the judge I find no difficulty in holding that the principles in Hallett's case, 13 Ch.D. 696 are of immediate application, and I think that the plaintiffs are entitled to trace these proceeds of sale and to recover them, as Mocatta J. has held by his judgment. Mr. Price relied upon the conduct of the parties after the defendants took over from the partnership, pointing out (as was the fact) that the defendants were never required to account to the plaintiffs in the way I think, as a matter of law, the plaintiffs were entitled to require them to account. As a matter of business I would not have expected the plaintiffs so to have required the defendants to account. But, as Mr. Lincoln forcefully replied on this point, clause 13 is directed to a state of insolvency, not to what he described as to the halcyon days of solvency; and it is only upon insolvency that the question of what the powers are under clause 13 comes into play. On the view which I have formed of this case it is not necessary to discuss some of the other interesting points on which we had the benefit of argument from counsel on both sides, and I refrain from doing so.

231 The Weekly Law Reports, July 2, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) Roskill L.J. \ For the reasons I have given, for my part I would unhesitatingly uphold Mocatta J.'s judgment and dismiss this appeal. GOFF LJ. I need not repeat any general statement of the facts. They have been fully set out in the judgment just delivered by Roskill LJ. The first question which arises for determination is whether clause 13 o of the general selling terms and conditions applied to the contracts made between the plaintiffs and the defendants or only to those made whilst the business was still being carried on by the partnership. If it did apply to the defendants, then it follows that the plaintiffs are entitled to recover the unsold stock and the appeal must fail as to that item. There is, however, then a second question whether, even so, the judgment is right in allowing the plaintiffs to recover the 35,000 odd proceeds of C sale. I turn to the first of these questions. [His Lordship said that there was in his view no doubt at all that, the partners having accepted and signed the translation of the general terms and conditions, the whole of those terms, including clause 13, applied to the contracts made by them and he agreed with Roskill LJ. that the reasoning of Mocatta J. on that part of the case was quite unchallengeable. His Lordship ~ continued:] In my judgment the second part of the case comes down to a short question of construction. It is common ground that a power of sale during the period that any money remains owing to the plaintiffs must be implied; but the question is upon what terms. I do not think it is necessary to go into the cases cited before Mocatta J., since it is clear to me, and was for a long time during the argument, E that the plaintiffs must, on the principle of In re Hallett's Estate, 13 Ch.D. 696, be entitled to trace their aluminium into the proceeds of sale so as to enable them to take the 35,000, and to take that sum in priority to the general body of the defendants' creditors and in priority to the secured creditor Hume, unless, as the defendants contend, one ought to imply a power to sell and apply the proceeds of sale for their own purposes, p or, as they put it, to sell for their own account. In the end this was accepted by both counsel, and nothing short of that will serve the defendants' purpose. The plaintiffs say that the power should be qualified so as to maintain for them the security which they gave themselves by providing that property in the aluminium should not pass so long as any money remains owing to them, and accordingly it could only be exercised for their benefit " in this sense, that the proceeds of sale must be held in trust for them until all the defendants' indebtedness to them on any contract be discharged. In considering this problem, one may at the outset dispose of one point. The provisions in the latter part of clause 13 dealing with cases where there has been admixture cannot, in my judgment, as a matter of " construction apply to the type of case with which we are concerned where there has been no admixture. Those provisions are, however, as Roskill L.J. has said, relevant in so far as they throw light upon what the implication in the earlier part should be; and indeed in an alternative submission, introduced by amendment, to which I must return later, the defendants submit that the power of sale to be implied is the same as that expressly provided in that latter part of clause

232 692 The Weekly Law Reports, July 2, 1976 Goff LJ. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) [1976] In considering what should be implied in a contract the court has to A. consider what is required to give it business efficacy; but I agree with Roskill LJ. that there are two distinct and opposing approaches to " business efficacy." The one, looking at the matter from the point of view of the defendants, suggests that an unqualified power is required, because they would need to use the money in carrying on their business, and indeed, so it is suggested, anything else would largely stultify the B agreement that they should have 75 days' credit. The other is, from the standpoint of the plaintiffs, that the power should not be so wide as to frustrate the whole purpose of clause 13, which it is submitted, and in my judgment rightly submitted, discloses a manifest intention to preserve the vendors from being left in the position of unsecured creditors. In the end, in my judgment, the question is which of these ought to prevail; and I have come to a clear conclusion that the plaintiffs' con- C tention should be preferred. There is no doubt force in Mr. Price's argument that this as a matter of strict law destroys the benefit of the 75 days' credit. I would observe, as Roskill LJ. has pointed out, that the General Selling Terms and Conditions as originally accepted by the partners provided for 14 days' credit only, and it may well be that in considering what should be _. implied one should disregard the later extension of time, in which case the point would be much weakened, although not altogether destroyed. I will assume, however, that the court ought to consider the matter in the light of that extension. Even so, in my judgment this is not enough to require, or entitle, the court to imply a term plainly and utterly inconsistent with the clear intention of the clause into which it is to be implied. E The difficulty arises largely because the general conditions tie the passing of the property not to the particular contract but to all indebtedness. But for that, the qualified power would not prevent the defendants from enjoying reasonable advantages from the 75 days' credit. No doubt in practice, so long as all went well the plaintiffs would allow the defendants to use the proceeds of sale in their business, as I understand they did; p but things ceased to go well, and now one has to determine the strict rights of the parties, and in my judgment the difficulty so imported is not enough to drive one to imply a term defeating the whole object of clause 13. I turn to the alternative argument which I have already mentioned. I do not myself think it is a correct approach simply to imply in the first part of clause 13 the same power as is expressed in the latter part and G which as a matter of construction does not apply to the first part and which is dealing with a different state of affairs. Even, however, if one does, it does not in my view help the defendants. The argument is that under that clause there is no equitable assignment of the book debts until the plaintiffs require the defendants, in the words of the translation before us, to " hand over to A.I.V. the claims he H has against his buyer," and, further, that as no such requirement was made before the security crystallised by the appointment of the receiver any equitable assignment resulting therefrom could only be subject to the security created by the debentures. I accept that as far as it goes, but it still leaves the question whether one should then construe the power as entitling the defendants to sell.and use the proceeds as and when received for their own benefit unless

233 The Weekly Law Reports, July 9, W.L.R. Aluminium Industrie B.V. v. Romalpa Ltd. (C.A.) Goff LJ. A and until required to assign the debt, or whether on the contrary, as the plaintiffs contend, it is implicit that the proceeds of sale when received are received on their account and the right to call for an assignment is ancillary only. In my judgment that would be the right view, even if one simply implied a power in precisely the same terms as expressed concerning mixed cases. In short, my conclusion is that the power of sale to be implied where none has been expressed must be so qualified as not to defeat the intention clearly shown by clause 13 as a whole, including the latter part, which only emphasises this. It follows that there was, as Roskill LJ. says, a sufficient fiduciary relationship between the parties, and this is indeed expressly contemplated in the reference to a fiduciary owner in the second part of clause 13. The implied power must, therefore, in my C judgment be a power to sell, not for the defendants' own account, but for the account of the plaintiffs unless and until all moneys owing be paid. For these reasons, I agree that this appeal fails as to both parts and should be dismissed. jv MEGAW LJ. Ground (1) of the notice of appeal raises the question whether Mocatta J. was wrong in holding that the terms of clause 13 of the plaintiffs' General Selling Terms and Conditions (I quote from the notice of appeal) " applied to and were incorporated in contracts for the sale of aluminium foil made between the plaintiff and the defendant"? If the defendants were right on this issue, they would succeed on the whole appeal each part of it. If they are wrong on this issue, they E would fail in their appeal as regards the part of the claim by the plaintiffs which relates to the aluminium foil still in the possession of the defendants, or the receiver. They would still have their further argument that, even so, the plaintiffs are not entitled to recover the moneys held by the receiver as moneys received from customers of the defendants. [His Lordship said that in his judgment the judge was clearly right to P hold as he did on that first issue, for the reasons given by him. He agreed with that part of Mr. Price's submission in which he had contended that more might be required to establish that a contracting party was to be treated as bound by a particular intended term, of the contents of which he was in fact unaware, when that term was an unusual one, than was required when the term was a usual one. He adhered to the view which he had expressed on that point in Thornton v. Shoe Lane Parking G Ltd. [1971] 2 Q.B. 163, 172. But in the present case the defendants were not unaware of the contents of the particular term. His Lordship continued: ] As regards the other ground put forward on behalf of the defendants, relating to the moneys in the hands of the receiver deriving from material which had been delivered by the plaintiffs to the defendants, the point H is I think indeed, as it ultimately was defined in this court, a short one, though, I would agree, by no means an easy one. It is a question of the true construction of clause 13 of the general selling terms and conditions. It is accepted by both parties that in the first part of the clause, dealing with, as it is called, " the material" that is, aluminium foil no' made up with other constituents into a " new object" some furthe term must be implied. There must be implied a right on the part of the defendants to arrange sales of the material. But are those sales to be VOL