COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR KEVIN GARNETT QC
(sitting as a Deputy Judge)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LAWS
SIR ANTHONY EVANS
| J.J. HARRISON (PROPERTIES) LIMITED
|- and -
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR ANTHONY MANN QC & MR C PARKER (instructed by Herbert Smith for the Claimant/ Respondent)
Crown Copyright ©
Lord Justice Chadwick :
The underlying facts
"5. . . . Holgate Bank Farm consisted of a farm house, a number of outbuildings close by and about 136 acres of farmland. In the early 1980's it was subject to a tenancy in favour of a Miss Naylor, who had succeeded to the tenancy on her father's death. It seems she was finding it difficult to make a success of the farm and in the summer of 1984 she eventually agreed to vacate for £37,500. She gave up the farmland itself shortly afterwards and it was amalgamated with the nearby Hollins Farm, which was being operated by another tenant farmer of Harrison Properties.
6. By April 1985, she had also vacated the farmhouse. As to this the plan was for it to be renovated and sold to Mrs Farmer's son, Mr Sean Frank. In the event this did not happen, and the renovated property was later sold off to a third party.
7. As I have already indicated, apart from the farmhouse and farmland, Holgate Bank Farm consisted of a number of outbuildings, including a large barn (the "Barn") and a further large farm building to the rear. There was also an adjoining paddock, the whole site extending to something over 3 acres. I will refer to this site as the Development Land. The buildings were generally in a very poor state of repair. Harrison Properties had for some time been attempting to do something with them and in July 1983 had applied for planning permission to convert the Barn into two residential units and the farm building to the rear into one residential unit. The application was refused on the basis, it seems, that conversion of the existing buildings would only be allowed if they were redundant as agricultural buildings, and the Planning Authority were not satisfied that this was the case. The possibility of the Barn becoming listed was also raised and in fact this happened shortly afterwards."
"I would point out, as you will be aware, that the Farm buildings are in a very dilapidated condition and as such are really of very little value. I appreciate the brick barn may have some development potential for conversion purposes and I have not taken this into account in my Valuation."
"I am pleased to say that my negotiations with the County Surveyors at Skipton have been successful in so far as they will totally withdraw their objections if we omit the vehicular access through the archway of the barn and make that access into a pedestrian one only.
I have taken the opportunity to inform Mr Colin Brown, the Chief Planning Officer, of this situation, and although he was not at the Committee Meeting on site, he felt that by removing the direction for refusal we have a greatly improved chance of success. I enclose a set of drawings with revisions that I suggest we make marked in red, and would strongly recommend that a new application be made which, even if refused by the committee would certainly put us in a very strong position on Appeal.
If you are anxious to proceed urgently with the barn conversion, I see no reason why we should not make two applications on the same plans as I feel it will be now virtually impossible to refuse that part of the scheme."
Following that letter, Mr Peter Harrison authorised the architect to make a fresh planning application in the name of Harrison Properties. That application was submitted on 5 February 1986. It was granted on 3 April 1986 (together with listed building consent in respect of the barn conversion) without the imposition of any significant planning conditions. The architect invoiced Harrison Properties for his work shortly thereafter.
"Conveyance of 3.28 acres of land forming part of Holgate Farm to Mr J P Harrison at the price of £8,400.00 as shown in the valuation by James Johnston. Mr Harrison, having an interest, did not vote and in order to obtain a quorum on this matter, Mrs Farmer was contacted by telephone.
Resolved by Mrs M. C. Farmer and Miss M.T. Harrison that the transaction be approved and the Common Seal of the Company be affixed by one Director and Secretary."
The conveyance of the land to Mr Harrison was completed on 12 February 1986.
"Peter Harrison also started construction work on the Manor House but for various reasons he decided not to pursue this project. He was running into financial difficulties, his builder had died and the market had collapsed. The Manor House site was put up for sale with only some foundations in place. A sale to a Mr Newsham fell through in 1991 but the property was eventually sold to a Mr and Mrs Braithwaite in April 1992 for £122,500."
". . . I find that she did not appreciate from the questions which Mrs Fuller asked her, or from what she learnt from Mrs Fuller about the apparent profit which Peter Harrison had made, that planning matters had reached the stage which they in fact had at the date of the February 1986 meeting. Her knowledge about these matters in 1992 was no different from what it had been at the date of the meeting. It seems likely that Mrs Fuller did mention the date of the planning permission to her, and I so find, but I think this was only in passing and I do not think it had the significance for her which is now claimed. I should again make the point that, at this time, relations between Terry Harrison and Peter Harrison were not especially strained and she had no other reasons for being suspicious of Peter Harrison."
"In the premises, at all material times until March 1998 the defendant was led to believe by the plaintiff that the said sale was a proper and unimpeachable transaction. In reliance upon the said belief, the defendant has changed his position and/or acted to his detriment by concurring with two shareholder buyouts by the plaintiff in 1990 and 1994 and in particular, by entering into an agreement dated 16 January 1990."
The effect of refusing to allow that amendment was that the judge did not have to consider a defence of laches based upon change of position.
". . . subject to the defence of laches, acquiescence and delay which is raised by Peter Harrison, Harrison Properties would have been entitled to set aside the conveyance of the Development Land without further inquiry. As the land has now all been sold to third parties, this is no longer possible and so the available remedies are either an account of profits or equitable compensation. See, for example, Movitex Ltd v Bulfield  BCLC 104 at 125e."
"Further, I accept that Peter Harrison was in breach of his duty to act bona fide in the best interests of Harrison Properties. It seems to me that his breaches included his failure to inform the other directors of the company fully of the facts about the planning status of the Development Land, his failure to do what he could to ensure that, if the company decided to sell the land, whether to him or to someone else, steps were taken such that it was sold at its full market value, and finally the use of the company's resources to prepare and apply for planning permission in the company's name at a time when Peter Harrison intended that he should buy the property and thus have the benefit of that work."
Nevertheless, the judge was not prepared to hold that Mr Harrison held the land conveyed to him in consequence of those breaches of duty on trust for the company.
The new evidence
"When you left the company in what might best be described as ignominious circumstances, Terry was most concerned that your reputation should not be tarnished and there should be no muck raking about your stewardship of the company. It was hoped that you would be able to enjoy a dignified retirement with your reputation intact and with a reasonable standard of living."
Mr Harrison has taken that letter to be an acknowledgement by Mr Giles, at least that Miss Terry Harrison made a conscious decision in or shortly after March 1992 that the company would not pursue any claims against him. Further, he submits that the letter shows that, contrary to the evidence which the judge accepted, Miss Terry Harrison had suspicions about his stewardship of the company at the time of his resignation as a director. It is said that, if that material had been before the judge, he would have reached a different conclusion on the issue of laches.
The constructive trust issue
"So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v Wakefield Waterworks Co [(1875) LR 20 Eq 474, 479], where he said:
'In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.'
"Regrettably, however, the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed a trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.
A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. . .
The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as a constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. . . ."
The defence under the Limitation Act 1980
"21(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party of privy; or
(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.
. . .
(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.
23 An action for an account shall not be brought after the expiration of any time limit under this Act which is applicable to the claim which is the basis of the duty to account."
In the present case, section 23 requires no separate consideration. The relevant question is whether Mr Harrison can rely upon the six year period of limitation prescribed by section 21(3) of the Act. The answer to that question turns upon two sub-issues: (i) whether the present action is "an action by a beneficiary to recover trust property or in respect of any breach of trust"; and (ii), if so, whether the present action is taken out of section 21(3) by the provisions of section 21(1)(b) of the Act.
"The importance of the distinction between the two categories of constructive trust lies in the application of the statutes of limitation. Before 1890 constructive trusts of the first kind were treated in the same way as express trusts and were often confusingly described as such; claims against the trustee were not barred by the passage of time. Constructive trusts of the second kind however were treated differently. They were not in reality trusts at all, but merely a remedial mechanism by which equity gave relief for fraud. The Court of Chancery, which applied the statutes of limitation by analogy, was not misled by its own terminology; it gave effect to the reality of the situation by applying the statute to the fraud which gave rise to the defendant's liability: see Soar v Ashwell  2 QB 390 at 393, [1891-4] All ER Rep 991 at 993 per Lord Esher MR:
'If the breach of the legal regulation relied on . . . makes, in the view of a Court of Equity, the defendant a trustee for the plaintiff, the Court of Equity treats the defendant as a trustee . . . by construction, and the trust is called a constructive trust; and against the breach which by construction creates the trust the Court of Equity allows Statutes of Limitation to be vouched.'
Lord Esher MR's reference to the breach of the legal relation shows that while the first kind of constructive trust was a creature of equity's exclusive jurisdiction the second arose in the exercise of its concurrent jurisdiction. For a fuller discussion of the distinction between the two categories of constructive trust, see Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at 632-633, Soar v Ashwell, Taylor v Davies  AC 636, Clarkson v Davies  AC 100, Selangor United Rubber Estates Ltd v Craddock (No 3) and Competitive Insurance Co Ltd v Davies Investments Ltd  3 All ER 254,  1 WLR 1240.
It was evidently considered unduly harsh that trustees should remain liable indefinitely for innocent breaches of trust when even common law actions for fraud were barred after six years and section 8 of the 1888 Act introduced a period of limitation (effectively six years) for such claims. Its purpose was to provide protection for trustees who would otherwise be liable without limitation of time (laches and acquiescence apart) where the breach of trust was committed innocently; see Re Richardson, Pole v Pattenden  1 Ch 423 at 440. It excepted two cases from its provisions: (i) where the claim was founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy, and (ii) where the proceeds were still retained by the trustee or had previously been received by the trustee and converted to his use. The same scheme was adopted by s 19 of the 1939 Act and s 21 of the 1980 Act."
The position, therefore is that, since the coming into operation of section 8 of the Trustee Act 1888, express trustees and constructive trustees within Lord Justice Millett's first category have been able to rely upon the limitation period now prescribed by section 21(3) of the 1980 Act, subject to the saving provisions now contained in section 21(1) of that Act.
"In order to ascertain the effect of the Trustee Act, 1888, and the corresponding Canadian statute, it is necessary to refer to the antecedent law of limitation as it applied to trustees. It is clear that apart from these statutes an express trustee could not rely, as a defence to an action by his beneficiary, either upon the statutes of limitation or upon the rules which were enforced by Courts of equity by analogy or in obedience to those statutes. The possession of an express trustee was treated by the Courts as the possession of his cestuis que trustent, and accordingly time did not run in his favour against them. This disability applied, not only to a trustee named as such in the instrument of trust, but to a person who, though not so named, had assumed the position of a trustee for others or had taken possession or control of the property on their behalf, such (for instance) as the persons enumerated in the judgment of Bowen LJ in Soar v Ashwell,, or those whose position was in question in Burdick v Garrick, In re Sharpe, Rochefoucauld v Boustead and Reid-Newfoundland Co v Anglo-American Telegraph Co. These persons, though not originally trustees, had taken upon themselves the custody and administration of property on behalf of others; and though sometimes referred to as constructive trustees, they were, in fact, actual trustees, though not so named. It followed that their possession also was treated as the possession of the persons for whom they acted, and they, like express trustees, were disabled from taking advantage of the time bar. But the position in this respect of a constructive trustee in the usual sense of the words that is to say, of a person who, though he had taken possession in his own right, was liable to be declared a trustee in a Court of equity was widely different, and it had long been settled that time ran in his favour from the moment of his so taking possession."
It is plain, therefore, that the Privy Council, in Taylor v Davies, recognised the distinction, to which Lord Justice Millett referred in the Paragon Finance case some 70 years later, between constructive trustees of the first category and what Viscount Cave described as "a constructive trustee in the usual sense of the words" that is to say, a person in Lord Justice Millett's second category (to whom, I think, he would prefer to deny the description 'constructive trustee' at all, if it were not already so deeply entrenched see  1 All ER 400, 409e-f, 414g).
"The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, i.e. money of the trust received by him and converted to his own use."
The appropriate remedy
Sir Anthony Evans: