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      There is no difficulty in tracing the stolen moneys. Moreover, it is self-evident that there must be a right to recover the moneys stolen and used for the payment of the 1989 and 1990 premiums. Equity's method of achieving the necessary result is to impose a lien or charge over the stolen money. The formal assertion to the contrary on behalf of the children, which is the subject of a cross appeal, is without substance. The question is whether the purchasers have equitable proprietary rights to the sum assured which was paid in terms of the policy. This brings me back to the distinctive feature of the case, namely that the fourth and fifth premiums did not contribute or add to the sum received by the children. Sir Richard Scott, V.-C., observed, [1998] Ch. 265, 282:

 ". . . If a trustee used trust money to improve or maintain his house, the beneficiaries would, in my view, be entitled to a charge on the house to recover their money. But unless it appeared that the improvements had increased the value of the house there would be no basis for a claim to a pro rata share in the house and no reason for the imposition of a constructive trust. There would, in such a case, be no benefit acquired by the use of the trust money for which the trustee would be accountable. Similar reasoning applies, in my opinion, in the present case. . . . They did not, in my opinion, become entitled to a pro rata share in the policy either via a constructive trust route or via a resulting trust route."

    On this point Hobhouse L.J. (now Lord Hobhouse of Woodborough) apparently took a similar view: at p. 291E-F. I am in respectful agreement with this reasoning of the majority on this aspect. The Vice-Chancellor and Hobhouse L.J. further concluded that the misapplied trust funds were not used to acquire the policy, or the death benefit of £1m. nor any share in either. On appeal to the House counsel for the purchasers while not formally conceding anything observed that the improvement argument is "a wholly unrealistic argument." He argued that the proceeds of the policy were purchased out of a common fund to which both the purchasers and the children had contributed. This was the primary issue on the appeal to the House.

    The argument of the purchasers is supported by the carefully reasoned dissenting judgment of Morritt L.J. He relied on the analogies of the cases where (1) an asset is bought with a mixed fund composed of trust money and the trustees own money, and is then passed to an innocent volunteer, and (2) a trustee mixes money from one trust with that of another, and uses the mixed fund to purchase an asset. Morritt L.J. pointed to longstanding authorities to the effect that in such situations beneficiaries may be entitled to a pro rata share of the purchased asset: at p. 301G-302B. But it is clear that this reasoning of Morritt L.J. is critically dependent on the relative closeness of the two analogies. On balance I have been persuaded that the analogies cited by Morritt L.J., and strongly relied on by counsel for the purchasers, are not helpful in the circumstances of the present case.

    There is in principle no difficulty about allowing a proprietary claim in respect of the proceeds of an insurance policy. If in the circumstances of the present case the stolen moneys had been wholly or partly causative of the production of the death benefit received by the children there would have been no obstacle to admitting such a proprietary claim. But those are not the material facts of the case. I am not influenced by hindsight. The fact is that the rights of the children had crystallised by 1989 before any money was stolen and used to pay the 1989 and 1990 premiums. Indeed Morritt L.J. expressly accepts that "in the event, the policy moneys would have been the same if the later premiums had not been paid:" at p. 302F. Counsel for the purchasers accepted that as a matter of primary fact this was a correct statement. But he argued that there was nevertheless a causal link between the premiums paid with stolen moneys and the death benefit. I cannot accept this argument. It would be artificial to say that all five premiums produced the policy moneys. The purchasers' money did not "buy" any part of the death benefit. On the contrary, the stolen moneys were not causally relevant to any benefit received by the children. The 1989 and 1990 premiums did not contribute to a mixed fund in which the purchasers have an equitable interest entitling them to a rateable division. It would be an innovation to create a proprietary remedy in respect of an asset (the death benefit) which had already been acquired at the date of the use of the stolen moneys. Far from assisting the case of the purchasers the impact of wider considerations of policy in truth tend to undermine the case of the purchasers. One needs to consider the implication of a holding in favour of the purchasers in other cases. Suppose Mr. Murphy had surrendered the policy before going bankrupt. Assume Mr. Murphy had partly used his own money and partly used money stolen from the purchasers to pay premiums. The hypothesis is that the stolen money did not in any way increase the surrender value of the policy. Justice does not support the creation to the prejudice of trade creditors of a new proprietary right in the surrender value of the policy: compare Roy Goode, Proprietary Restitutionary Claims, essay in Restitution: Past Present and Future, ed. Cornish, Nolan, O'Sullivan, and Virgo, p. 63 et seq. For these reasons I differ from the analysis of Morritt L.J. and reject the argument of the purchasers.

    There is one final matter of significance. In a critical final passage in his judgment Morritt L.J. observed, at p. 303A:

 ". . . In my view . . . common justice requires that the purchasers should have the right to participate in that which has followed from the use of their money together with the other moneys, taking their share out of that joint and common stock."

    The purchasers do not assert that they suffered any loss. They cannot assert that the children would be unjustly enriched if the purchasers' claim fails. In these circumstances my perception of the justice of the case is different from that of Morritt L.J. If justice demanded the recognition of such a proprietary right to the policy moneys, I would have been prepared to embark on such a development. Given that the moneys stolen from the purchasers did not contribute or add to what the children received, in accordance with their rights established before the theft by Mr. Murphy, the proprietary claim of the purchasers is not in my view underpinned by any considerations of fairness or justice. And, if this view is correct, there is no justification for creating by analogy with cases on equitable interests in mixed funds a new proprietary right to the policy moneys in the special circumstances of the present case.

    My Lords, for these reasons, as well as the reasons given by Lord Hope of Craighead, I would dismiss both the appeal by the purchasers (the appellants) and the cross appeal by the children (the cross appellants.)

LORD HOFFMANN

My Lords,

    I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett. I agree with him that this is a straightforward case of mixed substitution (what the Roman lawyers, if they had had an economy which required tracing through bank accounts, would have called confusio). I agree with his conclusion that Mr. Murphy's children, claiming through him, and the trust beneficiaries whose money he used, are entitled to share in the proceeds of the insurance policy in proportion to the value which they respectively contributed to the policy. This is not based upon unjust enrichment except in the most trivial sense of that expression. It is, as my noble and learned friend says, a vindication of proprietary right.

    The only point on which I differ from my noble and learned friend is the calculation of the proportions. The policy was a complicated chose in action which contained formulae for the calculation of different amounts which would become payable on different contingencies. One such formula (which, in the event, was irrelevant to the calculation of the amount payable) was by reference to notional units in a notional fund of notional investments. My noble and learned friend considers that these units should be treated as if they were real and that they formed separate property which some part of each premium had been used to buy. In my opinion, that overcomplicates the matter. The units were merely part of the formula for calculating what would be payable. They cannot be regarded as separate property or even some kind of internal currency. It would not in my view have mattered whether the formula for calculating the amount payable had been by reference to the movements of the heavenly bodies. The policy was a single chose in action under which some amount would fall due for payment in consideration of the premiums which had been paid. Immediately before Mr. Murphy's suicide, it was owned by the children and the beneficiaries in proportion to the value of their contributions to that consideration. The fact that the contingency which made the money payable was the death of Mr. Murphy cannot affect the proprietary interests in the chose in action and therefore in its proceeds: see D'Avigdor-Goldsmid v. Inland Revenue Commissioners [1953] A.C. 347.  In the case of contributions which are made at different times to the consideration for a single item of property such as the chose in action in this case, I can see an argument for saying that the value of earlier payments is greater than that of later payments. A pound today is worth more than the promise of a pound in a year's time. So there may be a case for applying some discount according to the date of payment. But no such argument was advanced in this case and I do not think that your Lordships should impose it upon the parties. I therefore agree with Morritt L.J. that the fund should be held simply in proportion to the contributions which the parties made to the five premiums.

LORD HOPE OF CRAIGHEAD

My Lords,

    This is a competition between two groups of persons who claim to be entitled to participate in the same fund. The fund consists of the death benefit paid by the insurers under a policy of life assurance to the trustees of the policy following the death of the life assured, Timothy Murphy, by suicide. The amount of the death benefit was £1m., to which a small sum was added as interest from the date of the death until payment. At the date of death the policy was held in trust for the children of the life assured and for his mother, who is also now deceased. The mother's share of the sum paid under the policy was distributed to her before her death. The trustees have made certain payments from the balance of that sum for the maintenance of the children. The remainder has been retained and invested by them, and it is that sum which forms the amount now in dispute. The third, fourth and fifth respondents, who are the children of the life assured, claim to be entitled to payment of the whole of that amount as the remaining beneficiaries under the trusts of the policy.

    There would have been no answer to the claim by the children had it not been for the fact that the last two of five annual premiums (and possibly a portion of the previous year's premium - the facts have yet to be established by evidence) were paid by the life assured out of money which, dishonestly and in breach of trust, he had misappropriated. The facts have been set out fully by my noble and learned friend Lord Browne-Wilkinson and I do not need to repeat them here. It is sufficient to say that it is not disputed that these premiums were paid from money which had been deposited with the life assured and his business associate Mr. Deasey by the purchasers of plots of land in Portugal. This money was to be held in trust on their behalf upon the trusts of a trust deed pending the carrying out by a company controlled by the life assured of a scheme for the development of the land. In the event the company did not carry out the development and the purchasers' money was misappropriated from the bank accounts into which it had been deposited. The purchasers' claim is to a share of the proceeds of the life insurance policy, on the ground that the rights under the policy had been paid for in part with money which was taken from them without their agreement and in breach of trust to pay the premiums.

    In the Court of Appeal it was held by a majority (Sir Richard Scott V.-C. and Hobhouse L.J., Morritt L.J. dissenting) that the purchasers were not entitled to participate in the proceeds of the policy except to the extent of such of their money, with interest thereon, as could be traced into the premiums: [1998] Ch. 265. Morritt L.J. would have granted a declaration to the effect that the proceeds were to be shared between the children and the purchasers. He held that they should be distributed between them in the same proportions as the life assured's own money and that which he took from the purchasers bore to the total amount paid to the insurers by way of premium during the lifetime of the policy. The purchasers have appealed against that judgment on the broad ground that common justice requires that the children should share the proceeds with them commensurately with the premiums which were paid by the life assured from his own money and the purchasers' money respectively. The children have cross-appealed on two grounds. The first is that the purchasers, having elected to take the benefit of other remedies, are precluded from pursuing any claim against the proceeds of the policy. The second is that the purchasers cannot trace their money into any part of the proceeds, because the right to payment of the sum of £1m. paid by the insurers as death benefit had already been acquired before the purchasers' money was used to pay the premiums.

    I shall deal first with the childrens' cross-appeal. Mr. Kaye for the children based his argument on election upon the purchasers' receipt of compensation for the breach of trust in other proceedings brought on their behalf. The appellant obtained a declaration in 1994 that the shares in the company and the land in Portugal which was to be developed by it were held in trust for the purchasers. He also obtained for them £600,000 under a compromise in 1997 with Lloyds Bank, with whom the purchasers' money had been deposited and from whose bank accounts it had been misappropriated to pay the 1990 premium. Mr. Kaye submitted that, as the purchasers had elected to recover their plots of land in specie and had received monetary compensation in satisfaction of their claims for the misappropriation of the deposit moneys, they were barred by that election from pursuing any claim against the proceeds of the policy. He maintained that the purchasers, by pursuing these remedies, had obtained all that they had bargained for when they paid their money to the developers. They no longer had any proprietary base from which they could trace, and they had already been fully compensated as they were now in a position to complete the development. As the entire original purpose of the deposits had been fulfilled, they had lost nothing. They were in no need of any further relief by way of any proprietary or equitable remedy.

    In my opinion the claims which were made against the developers and the bank and the claim now made against the proceeds of the policy are two wholly unrelated remedies. The purchasers were not put to any election when they were seeking to recover from the developers and the bank what they lost when, in breach of trust, their money was misappropriated. Had the claim which they are now making been one by way of damages, the relief which they have already obtained in the other proceedings would have been taken into account in this action in the assessment of their loss. That would not have been because they were to be held to any election, but by applying the rule that a party who is entitled to damages cannot recover twice over for the same loss. But in this action they are claiming a share of the proceeds of the policy on the ground that the money which was taken from them can be traced into the proceeds. The amount, if any, to which they are entitled as a result of the tracing exercise does not require any adjustment on account of the compensation obtained by pursuing other remedies. This is because the remedy which they are now seeking to pursue is a proprietary one, not an award of damages. The purpose of the remedy is to enable them to vindicate their claim to their own money. The compensation which they have obtained from elsewhere may have a bearing on their claim to a proportionate share of the proceeds. But it cannot deprive them of their proprietary interest in their own money. For these reasons I would reject this argument.

    Mr. Kaye then said in support of the cross-appeal that, if his argument on election were to be rejected, the purchasers were nevertheless unable to trace into any part of the policy moneys. He submitted that the majority of the Court of Appeal were wrong to hold that the purchasers were entitled to repayment of such amounts of their money as could be shown to have been expended by the life assured on the payment of the premiums. This was because the purchasers could not show that there was any proprietary or causal link between their money and the asset which they claimed, which was the death benefit paid under the policy. A contingent right to the payment of that sum was acquired at the outset when the first premium was paid by the life assured out of his own money. The purchasers' money did not add anything of value to what had already been acquired on payment of that premium. The sum payable on the death remained the same, and the rights under the policy were not made more valuable in any other respect by the payment of the additional premiums.

    I do not think that there is any substance in this argument. One possible answer to it is that given by Sir Richard Scott V.-C. [1998] Ch. 265, 277C-D, who said that the statements of principle by Fry L.J. in In re Leslie: Leslie v. French (1883) 23 Ch.D. 552, 560 supported the right of the purchasers to trace their money into the proceeds of the policy. On his analysis the life assured, as a trustee of the policy, was prima facie entitled to an indemnity out of the trust property in respect of the payments made by him to keep the policy on foot, and the purchasers can by subrogation pursue that remedy.

    I am, with great respect, not wholly convinced by this line of reasoning. It seems to me that the circumstances of this case are too far removed from those which Fry L.J. had in mind when he said a lien might be created upon the moneys secured by a policy belonging to someone else by the payment of the premiums. He referred, in his description of the circumstances, to the right of trustees to an indemnity out of the trust property for money which they had expended in its preservation, and to the subrogation to this right of a person who at their request had advanced money for its preservation to the trustees. In this case the life assured was a trustee of the policy, but he was also the person who had effected the policy and had set up the trust. When he paid the premiums, he did so not as a trustee - not because the person who was primarily responsible for their payment had failed to pay and it was necessary to take steps to preserve the trust - but because he was the person primarily responsible for their payment. The trust was one which he himself had created. He was making a further contribution towards the property which, according to his own declaration, was to be held in trust for the beneficiaries. In that situation it is hard to see on what ground the trustees of the policy could be said to be under any obligation to refund to him the amount of his expenditure. The general rule is that a man who makes a payment to maintain or improve another person's property, intentionally and not in response to any request that he should do so, is not entitled to any lien or charge on that property for such payment: Falcke v. Scottish Imperial Insurance Co. (1886) 34 Ch.D. 234, per Cotton L.J. at p. 241. A further difficulty about the subrogation argument is that it cannot be said that it was at the purchasers' request that the life assured used their money to pay the premiums.

    On the other hand I consider that there is no difficulty, on the facts of this case, as to the purchasers' right on other grounds to reimbursement of the money which was taken from them by the life assured. Mr. Kaye's argument was that the purchasers could not trace their money into the proceeds of the policy because no causative link could be established between the proceeds which had been paid out by way of death benefit and the relevant premiums. In my opinion the answer to this point is to be found in the terms of the policy. It states that "in consideration of the payment of the first premium already made and of the further premiums payable and subject to the conditions of this policy" the insurer was, on the death of the life assured, to pay to the policy holder the benefits specified. The purchasers' claim that they have a right to a proportionate share of the proceeds raises more complex issues, for the resolution of which it will be necessary to look more closely at the terms of the policy. But their right to the reimbursement of their own money seems to me to depend simply upon it being possible to follow that money from the accounts where it was deposited into the policy when the premiums were paid, and from the policy into the hands of the trustees when the insurers paid to them the sum of £1m. by way of death benefit.

    On the agreed facts it is plain that the purchasers can trace their money through the premiums which were paid with it into the policy. When the insurers paid out the agreed sum by way of death benefit, the sum which they paid to the trustees of the policy was paid in consideration of the receipt by them of all the premiums. As Professor Lionel Smith, The Law of Tracing (1997), p. 235, has explained, the policy proceeds are the product of a mixed substitution where the value being traced into a policy of life assurance has provided a part of the premiums. In my opinion that is enough to entitle the purchasers, if they cannot obtain more, at least to obtain reimbursement of their own money with interest from the proceeds of the policy. There can be no doubt as to where the equities lie on the question of their right to recover from the proceeds the equivalent in value of that which they lost when their money was misappropriated. I would dismiss the cross-appeal.

    There remains however the principal issue in this appeal, which is whether the purchasers can go further and establish that they are entitled to a much larger sum representing a proportionate share of the proceeds calculated by reference to the amount of their money which was used to pay the premiums. The purchasers' argument was presented by Mr. Mawrey on two grounds. The first was that they were entitled as a result of the tracing exercise to a proprietary right of part ownership in the proceeds which, on the application of common justice, enabled them to claim a share of them proportionate to the contribution which their money had made to the total sum paid to the insurers by way of premium. The second, which was developed briefly in the alternative and, I thought, very much by way of a subsidiary argument, was that the law of unjust enrichment would provide them with a remedy.

    It seems to me that two quite separate questions arise in regard to the first of these two arguments. The first question is simply one of evidence. This is whether, if the purchasers can show that their money was used to pay any of the premiums, they can trace their money into the proceeds obtained by the trustees from the insurers in virtue of their rights under the policy. The second question is more difficult, and I think that it is the crucial question in this case. As I understand the question, it is whether it is equitable, in all the circumstances, that the purchasers should recover from the trustees a share of the proceeds calculated by reference to the contribution which their money made to the total amount paid to the insurers by way of premium.

    I believe that I have already said almost all that needs to be said on the first question. It is agreed that the purchasers' money was used to pay the last two premiums. Whether their money was also used to pay a part of the 1988 premium, and if so, how much of it was so used will require to be resolved by evidence. But at least to the extent of the last two premiums the purchasers can trace their money into the policy. The terms of the policy provide a sufficient basis for tracing their money one step further. They show that this money can be followed into the proceeds received by the trustees of the policy by way of death benefit. It is clearly stated in the policy document that the benefits specified are to be made in consideration of the payment to the insurer of all the premiums. This is enough to show that the tracing exercise does not end with the receipt of the premiums by the insurers. They can say that they gave value for the premiums when they paid over to the trustees the sum to which they were entitled by way of death benefit. Nothing is left with the insurers, because they have given value for all that they received. That value now resides in the proceeds received by the trustees.

    But the result of the tracing exercise cannot solve the remaining question, which relates to the extent of the purchasers' entitlement. It is the fact that this is a case of mixed substitution which creates the difficulty. If the purchasers' money had been used to pay all the premiums there would have been no mixture of value with that contributed by others. Their claim would have been to the whole of the proceeds of the policy. As it is, there are competing claims on the same fund. In the absence of any other basis for division in principle or on authority - and no other basis has been suggested - it must be divided between the competitors in such proportions as can be shown to be equitable. In my opinion the answer to the question as to what is equitable does not depend solely on the terms of the policy. The equities affecting each party must be examined. They must be balanced against each other. The conduct of the parties so far as this may be relevant, and the consequences to them of allowing and rejecting the purchasers' claim, must be analysed and weighed up. It may be helpful to refer to what would be done in other situations by way of analogy. But it seems to me that in the end a judgment requires to be made as to what is fair, just and reasonable.

    My noble and learned friend Lord Hoffmann states that this is a straightforward case of mixed substitution, which the Roman lawyers (if they had an economy which required tracing through bank accounts) would have called confusio. I confess that I have great difficulty in following this observation, as the relevant texts seem to me to indicate that they would have found the case far from straightforward and that it is quite uncertain what they would have made of it.

      The discussion by the Roman jurists of the problems of ownership that arise where things which originally belonged to different people have been inextricably mixed with or attached to each other took place in an entirely different context. They were concerned exclusively with the ownership of corporeal property: with liquids like wine or solid things like heaps of corn, to which without any clear distinction in their use of terminology they applied what have come to be recognised as the doctrines of confusio and commixtio (Institutes of Justinian II.1.27 and 28), and with the application of the principle accessorium principale sequitur to corporeal property according to the type of property involved - accession by moveables to land, by moveables to moveables, by land to land and accession by the produce of land or the offspring of animals. I would have understood the application of the Roman law to our case if we had been dealing with the ownership of a collection of coins of gold or silver which had been melted down into liquids and transformed into another corporeal object such as a bracelet or a statue. That would indeed have been a problem familiar to Gaius and Justinian, which they would have recognised as being capable of being solved by the application of the doctrine of confusio. But here we are dealing with a problem about the rights of ownership in incorporeal property.

    The taking of possession, usually by delivery, was the means by which a person acquired ownership of corporeal property. The doctrines of commixtio and confusio were resorted to in order to resolve problems created by the mixing together, or attaching to each other, of corporeal things owned two or more people. Sandeman & Sons v. Tyzack and Branfoot Steamship Co. Ltd. [1913] A.C. 680, in which Lord Moulton described the doctrines of English law which are applicable to cases where goods belonging to different owners have become mixed so as to be incapable of either being distinguished or separated, was also a case about what the Roman jurists would have classified as corporeal moveables - bales of jute in the hold of a cargo vessel which were unmarked and could not be identified as belonging to any particular consignment. But incorporeal property, such as the rights acquired under an insurance policy upon payment of the premiums, is incapable either of possession or of delivery in the sense of these expressions as understood in Roman law. Problems relating to rights arising out of payments made by the insurers under the policy would have belonged in Roman law to the law of obligations, and it is likely that the remedy would have been found in the application of an appropriate condictio. This is an entirely different chapter from that relating to the possession and ownership of things which are corporeal.