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Session 1999-2000
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Judgments - Foskett (Suing on His Own Behalf and on Behalf of all Other Purchasers of Plots of Land at Mount Eden, Herradodo Cerro Alto Diogo, Martins, Algarve, Portugal (Original Appellant and Cross-Respondent) v. McKeown and Others (A.P.) (Original Respondents and Cross-Appellants)


  Lord Browne-Wilkinson   Lord Steyn   Lord Hoffmann   Lord Hope of Craighead   Lord Millett





ON 18 MAY 2000


My Lords,

     There are many cases in which the court has to decide which of two innocent parties is to suffer from the activities of a fraudster. This case, unusually, raises the converse question: which of two innocent parties is to benefit from the activities of the fraudster. In my judgment, in the context of this case the two types of case fall to be decided on exactly the same principles, viz. by determining who enjoys the ownership of the property in which the loss or the unexpected benefit is reflected.

    On 6 November 1986, Mr. Murphy effected a whole-life policy ("the policy") with Barclays Life Assurance Co. Ltd. ("the insurers") in the sum of £1m. at an annual premium of £10,220. The policy (which was issued on 27 January 1987) provided that on the death of Mr. Murphy a specified death benefit became payable, such benefit being the greater of (1) the sum assured (£1m.) and (2) the aggregate value of units notionally allocated under the terms of the policy to the policy at their bid price on the day of the receipt by the Insurers of a written notice of death. The policy stated that "in consideration of the first premium already paid and of the further premiums payable and subject to the conditions of this policy the company will on the death of the life assured pay to the policy holder or his successors in title ("the policy holder") the benefits specified."

    Although primarily a whole-life policy assuring the sum assured of £1m., the policy had an additional feature, viz. a notional investment content which served three purposes. First, it determined the surrender value of the policy. Second, it determined the alternative calculation of the death benefit if the value of the notionally allocated units exceeded the sum assured of £1m. Third, the investment element was used to pay for the cost of life cover after the payment of the second premium in November 1987. By condition 4 of the policy, units were notionally allocated to the policy upon receipt of the second and all subsequent premiums. By condition 6 of the policy, upon receipt of each premium resulting in the notional allocation of units under condition 4, the Insurers cancelled sufficient units to meet the cost of life cover for the next year. Condition 10 provided for conversion of the policy into a paid-up policy: units would thereafter continue to be cancelled under condition 6 so long as there were units available for that purpose. As soon as there were no units available, no death benefit or surrender value was to be available under the policy. Sir Richard Scott V.-C., [1998] Ch. 265, 275, summarised the position as follows:

     ". . . if a premium is not paid, then (provided at least two years' premiums have been paid) the policy is converted into a paid-up policy and units that have been allocated to the policy are applied annually in meeting the cost of life insurance until all the allocated units have been used up. Only at that point will the policy lapse."

    Five premiums were paid, in November 1986, 1987, 1988, 1989 and 1990. The 1986 and 1987 premiums were paid by Mr. Murphy out of his own resources. The 1989 and 1990 premiums were paid out of moneys misappropriated by Mr. Murphy from the plaintiffs. The source of the 1988 premium is disputed: unconditional leave to defend on issues relating to this premium has been granted.

    The policy was directed to be held on trusts. On 15 March 1989 the policy was irrevocably appointed to be held in trust for Mr. Murphy absolutely. On 16 March 1989 he settled the policy on trust for his wife and his mother but subject to a power for him to appoint to members of a class which included his wife, his mother and his children but which excluded Mr. Murphy himself. By a deed of appointment dated 1 December 1989 Mr. Murphy appointed the policy and all moneys payable thereunder upon trust (in the events which happened) as to one-tenth for Mrs. Brigette Murphy and as to nine-tenths for his three children equally.

    I turn then to consider the source of the moneys which constituted the fourth and fifth premiums. In 1988 Mr. Murphy, together with an associate of his, Mr. Deasy, acquired control of an English company which itself owned and controlled a Portuguese company. Those two companies between them marketed plots of land forming part of a site in the Algarve in Portugal to be developed and sold by them to purchasers. Each prospective purchaser entered into a contract with one of the companies for the purchase of his plot. The contract required each purchaser to pay the purchase price to Mr. Deasy, to be held by him upon the trusts of a trust deed ("the Purchasers trust deed") under which the purchasers' money was to be held in a separate bank account until either the plot of land was transferred to him or a period of two years had expired, whichever first happened. If after two years the plot had not been transferred to the purchaser the money was to be repaid with interest. Some 220 prospective purchasers entered into transactions to acquire plots on the building estate and paid some £2,645,000 to Mr. Deasy to be held by him on the terms of the purchasers trust deed. However, the land in Portugal was never developed. When the time came for the money to be refunded to the purchasers it was found that it had been dissipated and that £20,440 of those funds had been used to pay the fourth and fifth premiums due under the policy.

    Mr. Murphy committed suicide on 9 March 1991. On 6 June 1991 the insurers paid £1,000,580-04 to the two surviving trustees of the policy. Mrs. Murphy has been paid her one-tenth share. The dispute, for the rest, lies between Mr. Murphy's three children (as beneficiaries under the policy trust) and the purchasers of the plots in Portugal, from whose money £20,440 has been applied in breach of the trusts of the purchasers trust deed in paying the fourth and fifth premiums. The purchasers allege that, at a minimum, 40 per cent. of the premiums on the policy have been paid out of their moneys and that having traced their moneys through the policy into the policy moneys, they are entitled to 40 per cent. of the policy moneys. On the other side, the children contend that the purchasers are not entitled to any interest at all or at most only to the return of the sum misappropriated to pay the premiums, viz. £20,440 plus interest. The Court of Appeal, by a majority (Sir Richard Scott V.-C. and Hobhouse L.J., Morritt L.J. dissenting) [1998] Ch. 265, held that the purchasers were entitled to be repaid the amount of the fourth and fifth premiums together with interest but were not entitled to a pro-rata share of the policy proceeds.

    The purchasers appeal to your Lordships claiming that the policy moneys are held in trust for the children and themselves pro rata according to their respective contributions to the premiums paid out of the purchasers' moneys on the one hand and Mr. Murphy personally on the other, i.e. they claim that a minimum of 40 per cent. (being two out of the five premiums) is held in trust for the purchasers. The children, on the other hand, seek to uphold the decision of the majority of the Court of Appeal and, by cross-appeal, go further so as to claim that the purchasers are entitled to no rights in the policy moneys.

    As to the cross-appeal, I have read in draft the speech of my noble and learned friend Lord Hope of Craighead. For the reasons which he gives I would dismiss the cross-appeal.

    As to the appeal, at the conclusion of the hearing I considered that the majority of the Court of Appeal were correct and would have dismissed the appeal. However, having read the draft speech of Lord Millett I have changed my mind and for the reasons which he gives I would allow the appeal. But, as we are differing from the majority of the Court of Appeal I will say a word or two about the substance of the case and then deal with one minor matter on which I do not agree with my noble and learned friend Lord Millett.

    The crucial factor in this case is to appreciate that the purchasers are claiming a proprietary interest in the policy moneys and that such proprietary interest is not dependent on any discretion vested in the court. Nor is the purchasers claim based on unjust enrichment. It is based on the assertion by the purchasers of their equitable proprietary interest in identified property.

    The first step is to identify the interest of the purchasers: it is their absolute equitable interest in the moneys originally held by Mr. Deasly on the express trusts of the purchasers trust deed. This case does not involve any question of resulting or constructive trusts. The only trusts at issue are the express trusts of the purchasers trust deed. Under those express trusts the purchasers were entitled to equitable interests in the original moneys paid to Mr. Deasy by the purchasers. Like any other equitable proprietary interest, those equitable proprietary interests under the purchasers trust deed which originally existed in the moneys paid to Mr. Deasy now exist in any other property which, in law, now represents the original trust assets. Those equitable interests under the purchasers trust deed are also enforceable against whoever for the time being holds those assets other than someone who is a bona fide purchaser for value of the legal interest without notice or a person who claims through such a purchaser. No question of a bona fide purchaser arises in the present case: the children are mere volunteers under the policy Trust. Therefore the critical question is whether the assets now subject to the express trusts of the purchasers trust deed comprise any part of the policy moneys, a question which depends on the rules of tracing. If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense "equitable" for the purchasers to be so entitled. The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary. This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest as a result of which the court in its discretion provides a remedy. It is a case of hard-nosed property rights.

    Can then the sums improperly used from the purchaser's moneys be traced into the policy moneys? Tracing is a process whereby assets are identified. I do not now want to enter into the dispute whether the legal and equitable rules of tracing are the same or differ. The question does not arise in this case. The question of tracing which does arise is whether the rules of tracing are those regulating tracing through a mixed fund or those regulating the position when moneys of one person have been innocently expended on the property of another. In the former case (mixing of funds) it is established law that the mixed fund belongs proportionately to those whose moneys were mixed. In the latter case it is equally clear that money expended on maintaining or improving the property of another normally gives rise, at the most, to a proprietary lien to recover the moneys so expended. In certain cases the rules of tracing in such a case may give rise to no proprietary interest at all if to give such interest would be unfair: see In Re Diplock [1948] Ch. 465, 548.

    Both the Vice-Chancellor and Hobhouse L.J. considered that the payment of a premium on someone else's policy was more akin to an improvement to land than to the mixing of separate trust moneys in one account. Hobhouse L.J. was additionally influenced by the fact that the payment of the fourth and fifth premiums out of the purchasers' moneys conferred no benefit on the children: the policy was theirs and, since the first two premiums had already been paid, the policy would not have lapsed even if the fourth and fifth premiums had not been paid.

    Cases where the money of one person has been expended on improving or maintaining the physical property of another raise special problems. The property left at the end of the day is incapable of being physically divided into its separate constituent assets, i.e. the land and the money spent on it. Nor can the rules for tracing moneys through a mixed fund apply: the essence of tracing through a mixed fund is the ability to re-divide the mixed fund into its constituent parts pro rata according to the value of the contributions made to it. The question which arises in this case is whether, for tracing purposes, the payments of the fourth and fifth premiums on a policy which, up to that date, had been the sole property of the children for tracing purposes fall to be treated as analogous to the expenditure of cash on the physical property of another or as analogous to the mixture of moneys in a bank account. If the former analogy is to be preferred, the maximum amount recoverable by the purchasers will be the amount of the fourth and fifth premiums plus interest: if the latter analogy is preferred the children and the other purchasers will share the policy moneys pro rata.

    The speech of my noble and learned friend Lord Millett demonstrates why the analogy with moneys mixed in an account is the correct one. Where a trustee in breach of trust mixes money in his own bank account with trust moneys, the moneys in the account belong to the trustee personally and to the beneficiaries under the trust rateably according to the amounts respectively provided. On a proper analysis, there are "no moneys in the account" in the sense of physical cash. Immediately before the improper mixture, the trustee had a chose in action being his right against the bank to demand a payment of the credit balance on his account. Immediately after the mixture, the trustee had the same chose in action (i.e. the right of action against the bank) but its value reflected in part the amount of the beneficiaries' moneys wrongly paid in. There is no doubt that in such a case of moneys mixed in a bank account the credit balance on the account belongs to the trustee and the beneficiaries rateably according to their respective contributions.

    So in the present case. Immediately before the payment of the fourth premium, the trust property held in trust for the children was a chose in action i.e. the bundle of rights enforceable under the policy against the insurers. The trustee, by paying the fourth premium out of the moneys subject to the purchasers trust deed, wrongly mixed the value of the premium with the value of the policy. Thereafter, the trustee for the children held the same chose in action (i.e. the policy) but it reflected the value of both contributions. The case, therefore, is wholly analogous to that where moneys are mixed in a bank account. It follows that, in my judgment, both the policy and the policy moneys belong to the children and the trust fund subject to the purchasers trust deed rateably according to their respective contributions to the premiums paid.

    The contrary view appears to be based primarily on the ground that to give the purchasers a rateable share of the policy moneys is not to reverse an unjust enrichment but to give the purchasers a wholly unwarranted windfall. I do not myself quibble at the description of it being "a windfall" on the facts of this case. But this windfall is enjoyed because of the rights which the purchasers enjoy under the law of property. A man under whose land oil is discovered enjoys a very valuable windfall but no one suggests that he, as owner of the property, is not entitled to the windfall which goes with his property right. We are not dealing with a claim in unjust enrichment.

    Moreover the argument based on windfall can be, and is, much over-stated. It is said that the fourth and fifth premiums paid out of the purchasers' moneys did not increase the value of the policy in any way: the first and second premiums were, by themselves, sufficient under the unusual terms of the policy to pay all the premiums falling due without any assistance from the fourth and fifth premiums: even if the fourth and fifth premiums had not been paid the policy would have been in force at the time of Mr. Murphy's death. Therefore, it is asked, what value has been derived from the fourth and fifth premiums which can justify giving the purchasers a pro rata share. In my judgment this argument does not reflect the true position. It is true that, in the events which have happened, the fourth and fifth premiums were not required to keep the policy on foot until the death of Mr. Murphy. But at the times the fourth and fifth premiums were paid (which must be the dates at which the beneficial interests in the policy were established) it was wholly uncertain what the future would bring. What if Mr. Murphy had not died when he did? Say he had survived for another five years? The premiums paid in the fourth and fifth years would in those events have been directly responsible for keeping the policy in force until his death since the first and second premiums would long since have been exhausted in keeping the policy on foot. In those circumstances, would it be said that the purchasers were entitled to 100 per cent. of the policy moneys? In my judgment, the beneficial ownership of the policy, and therefore the policy moneys, cannot depend upon how events turn out. The rights of the parties in the policy, one way or another, were fixed when the relevant premiums were paid when the future was unknown.

    For these reasons and the much fuller reasons given by Lord Millett, I would allow the appeal and declare that the policy moneys were held in trust for the children and the purchasers in proportion to the contributions which they respectively made to the five premiums paid.

    There is one small point on which my noble and learned friends Lord Millett and Lord Hoffmann disagree, namely, whether the pro rata division should take account of the notional allocation of units to the policy and to the fact that contributions were made at different times, i.e. when the various premiums were paid. I agree that, for the reasons given by Lord Hoffmann, it is not necessary to complicate the calculation of the pro rata shares by taking account of these factors and would therefore simply divide the policy moneys pro rata according to the contributions made to the payment of the premiums.


My Lords,

    This is a dispute between two groups of innocent parties about the rights to a death benefit of about £1m. paid by insurers pursuant to a whole life policy. The first group are individuals who contracted between June 1989 and January 1991 to purchase plots of land in Portugal which were intended to be developed as an estate with villas and a golf and country club. Mr. Timothy Murphy was the dominant figure behind the development project. He obtained over £2.6m. from the purchasers. With effect from November 1987 he took out a whole life policy at an annual premium of £10,200. The policy had an investment content, which served various purposes. It determined the surrender value of the policy. It determined the alternative calculation of the death benefit if the value of notionally allocated units exceeded the sum assured (i.e. £1m.) The investment element was to be used to pay for the cost of life cover after the payment of the second premium. Mr. Murphy used his own money to pay the premiums for 1986 and 1987. The value of the units allocated to the policy after the payment of the 1987 premium was more than enough to pay for the life element in the next three years. Mr. Murphy in fact paid the premium for 1988. It is still unclear where he got the money from. But he undoubtedly paid the premiums for 1989 and 1990 with money stolen from the purchasers. On 9 March 1991 Mr. Murphy committed suicide. On 6 June 1991 the insurers paid a sum of about £1 million as a death benefit under the policy. The children are express beneficiaries of the trusts of the policy. The purchasers claimed a proportionate part of the policy moneys. The issue concerns the respective rights of the purchasers and the children to the policy moneys. By a majority the Court of Appeal reversed the trial judge's decision in favour of the purchasers and decided that the purchasers are only entitled to recover the money stolen from them and used to pay the 1989 and 1990 premiums together with interest: Foskett v. McKeown [1998] Ch. 265. On appeal to the House of Lords the primary case of the purchasers was that they are entitled to share in the policy moneys in the same proportion as the amount of the premiums paid out of the purchasers' moneys bear to the total amount of the premiums paid i.e. a two-fifths share. I will explain my reasons for concluding that the purchasers have no rights to the policy moneys. There is, however, an anterior point. On the appeal to the House of Lords counsel for the children argued that by resorting to other remedies the purchasers made a binding election which preclude them from advancing their present claim. In my view there was in truth no inconsistency between the remedies to which the purchasers resorted.

    The purchasers put forward a proprietary claim. They allege that they are equitable co-owners in the policy moneys: specifically their claim is that they are entitled to 40 per cent. and the children to 60 per cent. of the policy moneys. The purchasers point out that they can trace the stolen money (£20,440) through various bank accounts into payments in respect of the 1989 and 1990 premiums. Given that a total of five premiums were paid the purchasers assert that they are entitled to equitable proprietary rights to 40 per cent. of the sum assured. The purchasers argued that the proceeds of the policy were purchased out of a common fund to which the purchasers and the children contributed and that on equitable principles the purchasers are entitled to a proportionate part of the proceeds. Counsel for the purchasers observed in his printed case that it is not an area of the law where the House is constrained by previous authority. Accordingly, he argued, wider considerations of policy must be taken into account.

    There are four considerations which materially affect my approach to the claim of the purchasers. First the relative moral claims of the purchasers and the children must be considered. The purchasers emphasise that their claim is the result of the deliberate wrongdoing of Mr. Murphy. This is a point in favour of the purchasers. Moreover the case for the children is not assisted by the fact that Mr. Murphy sought to make provision for his family. The legal question would be the same if the beneficiary under the express trust was a business associate of Mr. Murphy. On the other hand, it is an important fact that the children were wholly unaware of any wrongdoing by their father. Secondly, it is clear that in the event the premiums paid in 1989 and 1990 added nothing of value to the policy. The policy was established and the children acquired vested interests (subject to defeasance) before Mr. Murphy pursuant to the rights acquired by the children before 1989. The entitlement of the children was not in any way improved by payment of the 1989 and 1990 premiums. Thirdly, the purchasers have no claim in unjust enrichment in a substantive sense against the children because the payment of the 1989 and 1990 premiums conferred no additional benefit on the children. They were not enriched by the payment of those premiums: they merely received their shares of the sum assured in accordance with their pre-existing entitlement. The fourth point is that the children, as wholly innocent parties, can cogently say that, if they had become aware that Mr. Murphy planned to use trust money to pay the fourth and fifth premiums, they would have insisted that he did not so pay those premiums, with the result that they would still have received the same death benefit. (The relvance of such a factor is helpfully explained by Professor Hayton, "Equity's Identification Rules," Chapter 1 in P. Birks (ed) Laundering and Tracing (Oxford, 1995), p. 11-12 and Charles Mitchell, Tracing Trust Funds Into Insurance Proceeds, [1997] L.M.C.L.Q. 465, 472.)

    In arguing the merits of the proprietary claim counsel for the purchasers from time to time invoked "the rules of tracing." By that expression he was placing reliance on a corpus of supposed rules of law, divided into common law and equitable rules. In truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced. In a crystalline analysis Professor Birks (The Necessity of a Unitary Law of Tracing, essay in Making Commercial Law, Essays in Honour of Roy Goode, (1997), pp. 239-258) explained that there is a unified regime for tracing and that "it allows tracing to be cleanly separated from the business of asserting rights in or in relation to assets successfully traced": at p. 257. Applying this reasoning Professor Birks concludes at p. 258:

     ". . . that the modern law is equipped with various means of coping with the evidential difficulties which a tracing exercise is bound to encounter. The process of identification thus ceases to be either legal or equitable and becomes, as is fitting, genuinely neutral as to the rights exigible in respect of the assets into which the value in question is traced. The tracing exercise once successfully completed, it can then be asked what rights, if any, the plaintiff can, on his particular facts, assert. It is at that point that it become relevant to recall that on some facts those rights will be personal, on others proprietary, on some legal, and on others equitable."

    I regard this explanation as correct. It is consistent with orthodox principle. It clarifies the correct approach to so-called tracing claims. It explains what tracing is about without providing answers to controversies about legal or equitable rights to assets so traced.