England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE BLACKBURNE

		Royal Courts of Justice Strand, London, WC2A 2LL
		28 January 2000

LORD JUSTICE CHADWICK:

1. This is an appeal from an order made on 1 July 1998 by Mr Justice Blackburne in proceedings brought by the appellant, Banner Homes Group Plc ("Banner"), in relation to a development site at White Waltham, Berkshire. The site was acquired, in November 1995, by the second respondent, Stowhelm Limited ("Stowhelm"). Stowhelm was then a wholly owned subsidiary of the first respondent, Luff Developments Limited ("Luff"). Banner's principal claim in the action was that, prior to the acquisition of the site by Stowhelm, an oral agreement had been made between Banner and Luff, for the acquisition and development of the site as a joint venture. The judge dismissed that claim; holding that there had been no concluded agreement. There is no appeal against that part of his decision. He dismissed, also, a claim in the alternative that, notwithstanding the absence of any concluded agreement, the circumstances in which the site was acquired by Stowhelm gave rise to a constructive trust in favour of Banner over one half of the shares in Stowhelm held by Luff. It is against the judge's dismissal of the constructive trust claim that Banner appeals to this Court.

The primary facts

2. The judge's findings of primary fact – against which there is no appeal - may be summarised as follows:

(1) At all material times prior to November 1995 the site, comprising some 6.8 acres was vested in M L Aviation Limited subject to an uncompleted contract with M L Holdings Plc ("MLH") as purchaser. The site was ripe for redevelopment and MLH wished to dispose of it.

(2) Hewland Engineering Limited ("Hewland") was an interested purchaser for its own use and occupation; but only in respect of some two acres of the site. MLH wished to sell the site as a single lot to a single purchaser. In October 1994 Hewland was introduced to Luff as a prospective development partner. In January 1995 agents for Luff approached MLH on behalf of Luff and Hewland as co-purchasers with an offer for the site. The basis of the offer was subsequently modified to accommodate MLH's requirement that it would deal with a single purchaser, Luff, with Hewland becoming a sub-purchaser of the two acres in which it was interested.

(3) The scale and nature of the purchase and subsequent redevelopment were such that Luff looked for a joint venture partner in relation to the balance of the site (some 4.8 acres) that would remain after the sub-sale to Hewland. In March 1995 Luff was introduced to Banner. Banner had, itself, known of and been interested in the site in 1994; but that interest had not been pursued at that time in the light of actual or perceived planning constraints. The introduction led to a meeting on 20 March 1995 between Mr Stuart Crossley, Banner's chairman and chief executive, and Mr Bob Pattison, a chartered surveyor who was employed as Luff's development manager.

(4) Immediately following that meeting: (a) Luff's agents wrote to the agents for MLH with a revised offer to purchase the whole site at a price of £3.4 million, subject to satisfactory detailed planning permission for the erection of a factory for occupation by Hewland and for the development of the remainder of the site as office accommodation; and (b) Mr Crossley wrote to Luff's agents, with a copy to Mr Pattison, confirming Banner's interest in a joint venture in which both parties would contribute equal equity and would share profits and losses equally.

(5) Mr Pattison replied to Mr Crossley on 3 April 1995. The letter included the following paragraphs:

The terms referred to in your letter of 22nd March are in line with our own views on this scheme and should provide the basis for a mutually successful project.

We have looked at previous J V agreements we have entered into but on balance and following brief discussions with our legal advisors and Midland Bank plc, it would appear that the simplest solution may be the formation of a Joint Venture Company with each party holding 50% of the share capital. The company's Memorandum and Articles of Association will outline the agreement between the shareholders.

(6) There was little further progress towards the acquisition of the site, or the proposed joint venture, until the end of June 1995. But, by the end of June, the price for the whole site had been agreed between agents for Luff and MLH at £3.4m (subject to contact) with the sub-sale of two acres to Hewland at a price of £1.2m. It was against that background that there was a further meeting between Mr Crossley and Mr Pattison on 14 July 1995. At that meeting there was agreement in principle as to matters recorded by Mr Crossley in a contemporaneous manuscript note. Those matters were: (a) that the site should be purchased from MLH at a price of £3.4m with a sub-sale to Hewland at £1.2m – leaving a balance of £2.2m to be funded by Luff and Banner as joint venturers; (b) that up to £100,000 would be spent on initial work, to include demolition, marketing, roads and any requirement imposed by the local authority; (c) that the purchase and initial work would be effected through a new single enterprise company to be acquired for the purpose and to be owned 50:50 by Luff and Banner; (d) that, at the end of nine months from the acquisition, unless Luff and Banner had reached agreement as to the development of that part of the site remaining after the sub-sale to Hewland, that remaining part of the site would be the subject of a "Texas shoot out" or disposed of on the open market at the best price that could be obtained. A "Texas shoot out" was understood to mean an arrangement under which either party could offer put and call options at a specified price or prices which the other could accept or refuse.

(7) On 20 July 1995 Mr Pattison wrote to Mr Crossley expressing the hope that a forthcoming meeting with Mr Peter Luff, his chairman, "will prove to be the start of a successful and profitable joint venture". On the same day Mr Pattison wrote to Mr Peter Vass, Luff's solicitor. The letter included the following paragraph:

We propose to form a 50/50 joint venture company with Banner Homes plc of [address] to acquire the above property [the White Waltham site] from M L Aviation at a figure of £3.4M.

The letter went on to give Mr Vass the name of Banner's solicitor; and to inform him of the proposed sub-sale to Hewland.

(8) The meeting with Mr Peter Luff took place, as arranged, on 24 July 1995. There was a brief discussion of the matters which had been agreed between Mr Crossley and Mr Pattison on 14 July. It was agreed that both Banner and Luff would instruct solicitors to prepare a written document.

(9) On 24 July 1995 Mr Vass wrote to Banner's solicitor "in connection with the proposed joint venture with Luff". He referred to "a purchase in the name of a newly formed limited company"; as to which, he said, he would be getting instructions in due course. Mr Vass received those instructions in the course of a telephone call from Mr Pattison on the following day. In his witness statement, which stood as his evidence in chief, he said this:

11. In my file, dated 25^th July 1995, is my hand written note of my telephone conversation with Robert Pattison of Luff. He instructed me to form a new company which was to be a single asset company just for this one project as they have done from time to time in the past. This could also be a suitable vehicle for the joint venture agreement. If there was a joint venture agreement the directors were eventually to be Stuart Crossley from Banner Homes and Peter Luff of Luff who was also to be the secretary.

12. Accordingly I bought a company called Stowhelm Limited off the shelf.

(10) Between late July and late August 1995 Mr Vass corresponded with Banner's solicitor in relation to the purchase of the site from MLH. Banner's solicitor made a number of minor amendments to the draft purchase contract. Mr Vass sent him the preliminary enquiries which he had raised with MLH's solicitors.

(11) On 11 August 1995, Mr Neville Bailey, Banner's technical director, visited the site with a view to identifying any potential features which might affect its future use – in particular, possible asbestos contamination. Following that visit, and a favourable report from environmental consultants, there was a meeting between Mr Bailey, Mr Crossley and Mr Pattison on 16 August 1995. That evening Mr Pattison sent to Mr Crossley by fax what he described on the cover sheet as "The White Waltham j v agreement":

MEMORANDUM OF HEADS OF TERMS FOR JOINT VENTURE COMPANY

1. 50/50 deadlocked Company each having a board member.

2. A 9 month period during which we renew outline consent and we market site via agents.

3. We spend jointly up to £100,000 on demolition, preparatory works, subsequent to receipt of renewed planning consent.

4. After 9 months from completion of purchase, if no agreement on how to proceed we have a 'Texas Shootout', either party can buy out the other, ie one party makes a bid and the other party can buy or sell.

In the event that this doesn't work the site can be put on the market and sold at best price.

5. All expenses/costs are to be mutually agreed and shared.

Mr Pattison sent a copy of that memorandum, described in his covering note as a "draft memorandum on the J V Company", to Mr Vass on 17 August 1995, with the instruction that Mr Vass was to speak to Banner's solicitor "and sharpen up the wording if appropriate". Before Mr Vass had done so, Banner's solicitor had prepared a lengthy draft of a shareholders' agreement which he sent to Mr Vass on 24 August 1995.

(12) The draft shareholders' agreement received little or no attention from either side until it was produced at a meeting at Banner's offices on 18 October 1995. The delay in the meantime had been caused, in part at least, by the need for a site investigation into the existence of services running under the site. There was, by this stage, growing pressure from both MLH and Hewland to exchange contracts.

(13) The draft shareholders' agreement was produced, but not discussed in detail, at the meeting on 18 October 1995. By that time Luff was beginning to have second thoughts as to the wisdom of having Banner as a joint venturer. But it did not share those thoughts with Banner. It was willing to keep Banner "on board until someone or something better turned up". Luff was aware that, if dropped, Banner might emerge as a rival for the site.

(14) There was a lengthy meeting at Luff's offices on 23 October 1995. The purpose of the meeting was to agree (if possible) the shareholders' agreement. Extensive amendments were made to the draft which had been prepared by Banner's solicitor; but, by the end of the meeting, further work was still needed. Time was pressing: first, because exchange of contracts with MLH and Hewland was imminent; and, secondly, because Mr Vass (Luff's solicitor) was about to go on holiday. Banner's solicitor was concerned that there should be some documentation in place between Banner and Luff before contracts were exchanged for the acquisition of the site. There was, also, of course, a question as to how the acquisition would be funded. The judge set out, in some detail, the conversations and correspondence which took place - and the proposals and counter-proposals which were advanced – in the last week of October. It is unnecessary to rehearse them in this summary. It is sufficient to adopt the description by the judge of the position as at the exchange of contracts for the purchase and sub-sale on 1 November 1995:

It is clear, therefore, that, to Banner's knowledge, exchange of contracts was to occur, and did occur, before the parties were signed up to any formal written agreement. It is equally clear that Luff had given Banner to understand that it was content to exchange contracts without requiring any form of separate guarantee committing Banner to contribute one half of the costs of the net site and that the reason for this was that the mutual rights and obligations of the parties would be set out in the shareholder agreement. It is also clear that both sides intended to enter into the shareholder agreement as soon as possible, the only reason for the delay being Mr Vass's absence on holiday. At no stage was any indication given that reasons existed why the agreement should not be entered into. Specifically nothing was said on either side to indicate that any difference of principle existed which would prevent the parties from agreeing terms.

(15) Completion of the site acquisition, and of the sub-sale to Hewland, was due to take place on 22 November 1995. Mr Vass returned from holiday on 6 November 1995. There was an obvious need to reach agreement as to the terms of the joint venture agreement. The remaining points of difference were resolved at a meeting on 16 November 1995; but subject to further consideration by Luff's representatives as to the way in which one clause of the agreement – clause 19, which provided for the transfer of the shares in Stowhelm by one party to the other in the event of breach or insolvency – would operate in practice. The judge found that Banner was left in the belief that Luff had every intention of wanting to proceed with the joint venture. But Luff, itself, was having further thoughts. On 21 November 1995 it sought advice from a solicitor who was thought to have special expertise in relation to joint ventures. He expressed serious doubts as to the commercial benefit to Luff of the agreement in the form negotiated. On receipt of that advice, on or shortly after 23 November 1995, Luff decided to withdraw. That decision was not communicated to Banner until, at the earliest, 15 December 1995; and not in unequivocal terms until 4 January 1996.

(16) In the meantime, on 22 November 1995, Stowhelm completed the purchase of the site from M L Aviation Limited; and completed its sub-sale to Hewland. Stowhelm's purchase was funded by monies made available by Luff. Banner learnt that completion had taken place a few days thereafter.

The judgment below

3. The judge addressed, first, the question whether Banner and Luff had entered into a binding contract. He held that no binding contract had come into existence. First, he was satisfied that there was no intention, on either side, to enter into an agreement binding in law unless and until the terms of that agreement were set out in a formal document and signed by the parties. It was intended that that document should be the shareholders' agreement. In the event, no shareholders' agreement (or any other agreement) was signed. Secondly, there was no certainty as to the terms of the proposed shareholders' agreement until the meeting of 16 November 1995. Thirdly, even after that meeting, the agreement as to terms remained conditional on Luff's acceptance of clause 19. The judge expressed his view on the first – and, perhaps, decisive – point in the following passage of his judgment:

Banner's whole approach to the need to have a detailed shareholder agreement signed and in place together with its actions from and after 23 October to bring this about, make it reasonably plain that it regarded the signing of a formal shareholder agreement as the trigger for the payment of its share of the site acquisition and other costs, the acquisition of its shareholding in Stowhelm and the appointment of its nominees to Stowhelm's board. This conduct is difficult to reconcile with the view that the parties were already contractually bound to each other. On the other hand it is entirely consistent with the view that, until a signed agreement was in place, neither side was contractually bound to the other.

As I have already mentioned, there is no appeal against that finding.

4. The judge then considered a submission that Luff was estopped from denying the existence of a binding contract for a joint venture. He rejected that submission on the ground that "on the facts as I have found them, there never was any assumption common to both sides (a necessary ingredient of the estoppel if it is to be established) that a binding contract was already in existence". There is no appeal against that finding. But the judge went on to say this:

Banner's belief, encouraged by Luff's conduct and representations leading up to and in the days following exchange of contracts for the White Waltham site on 1 November, that the joint venture proposal was proceeding and that there would be a formal agreement setting out the terms of their relationship is rather different and is relevant to the question whether, in the circumstances, Banner can establish that the net site (or Luff's shareholding in Stowhelm) is subject to a constructive trust in its favour.

He returned to that point when giving the first of two reasons for rejecting the constructive trust claim. He said this:

First, although from 14 July until 16 November (if not later) Luff gave Banner to understand that there would be a joint venture and that it intended to enter into a shareholder agreement to regulate their relationship and although, for its part, Banner continued throughout to have every intention of entering into a joint venture with Luff and of agreeing and signing a shareholder agreement, the communications between them proceeded on the footing, as I have mentioned, that, unless and until a shareholder agreement was entered into, neither side was legally committed. Implicit in this was that either side had the right to withdraw.

. . .

That being the position, I do not see how Banner's hope and expectation, however much Luff may have encouraged it, that a formal agreement would be entered into following which Banner would discharge the obligations and take the benefits arising under the joint venture, can give rise to the common arrangement or understanding which is a necessary foundation for the establishment of the equity. I do not see how equity can turn a common arrangement or understanding, which is implicitly qualified by the right of either side to withdraw, into an unqualified arrangement or undertaking which denied any such right. It is equity's function, where it can, to give effect to the parties' bargain, but not to make or alter it for them.

5. The judge gave as a second reason for rejecting the constructive trust claim that (even if the necessary arrangement or understanding had existed) Banner had failed to show that it had acted to its detriment in reliance on that arrangement or understanding. He referred to the evidence of Mr Crossley (Banner's chairman and chief executive) that Banner would have considered seriously making its own bid for the site:

Q. ………When precisely do you say that you would have been serious about making a bid for the site?

A It never arose. We never thought about it at the time. I am simply saying that the size of the transaction, the level of confidence by – and I cannot be precise because it is hypothetical and it is historic and the question never arose at the time -–but by September or October the property market, especially the housing market (which is the main source of our well-being) had moved to such a degree that we could well have been able to afford the whole site. . . . It was our ambition during this time to expand our activities in commercial property . . .

He dismissed the contention that, but for its understanding that there was to be a joint venture, Banner would have entered the market as "a speculation". He said this:

A speculation as to what Banner might have done (let alone what it would have done) in September or October 1995 – not if there had been no common arrangement or understanding at all but if, having come to some arrangement or understanding with Banner, Luff had subsequently withdrawn - does not seem to me to [be] an act of detriment which enables Banner to establish its equity if otherwise the conditions for its establishment are present.

6. In reaching the conclusion that Banner had failed to establish a constructive trust over the shares in Stowhelm, the judge expressed "some regret because I consider that Banner was somewhat ill-used by Luff". Nevertheless, given the findings of fact which he had made, it was a conclusion at which, as he said, he felt bound to arrive.

The law: constructive trusts

7. The judge was referred – as we have been – to a number of cases at first instance which illustrate the circumstances in which equity will impose a constructive trust on property acquired by one person, say 'A', in furtherance of some pre-acquisition arrangement or understanding with another, say 'B', that, upon the acquisition of the property by A in circumstances in which B kept out of the market, B would be granted some interest in the property; notwithstanding that the arrangement or understanding falls short of creating contractual obligations enforceable at law. It is helpful, I think, to preface an examination of those cases with the overview, recently provided by Lord Justice Millett in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, of the underlying principles applicable in this area. He said this, at page 408j-409d:

. . . the expressions 'constructive trust' and 'constructive trustee' have been used by equity lawyers to describe two entirely different situations. The first covers those cases . . . where the defendant, though not expressly appointed as trustee, had 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. Well-known examples of such a constructive trust are McCormick v Grogan (1869) LR HL 82 (a case of a secret trust) and Rochefoucald v Boustead [1897] I Ch 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1952] 2 All ER 951, [1953] Ch 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.

8. Lord Justice Robert Walker pointed out in Yaxley v Gotts [1999] 3 WLR 1217, at page 1227 E, that the principles upon which equity acts in what Lord Justice Millett had described, in Paragon Finance v Thakerar, as the first class of constructive trust case have much in common with those of proprietary estoppel. He said this, at page 1227 G:

Plainly there are large areas where the two concepts do not overlap . . . But in the area of a joint enterprise for the acquisition of land (which may be, but is not necessarily, the matrimonial home) the two concepts coincide. Lord Diplock's very well known statement in Gissing v Gissing [1971] AC 886, 905 brings this out:

"A resulting, implied or constructive trust – and it is unnecessary for present purposes to distinguish between these three classes of trust – is created by a transaction between the trustee and the cestui que trust in connection with the acquisition of a legal estate in land, whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired. And he will have so conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so doing he was acquiring a beneficial interest in the land."

9. Lord Justice Robert Walker drew attention to the observations of Lord Bridge of Harwich in Lloyds Bank Plc v Rosset [1991] 1 AC 107 – also a matrimonial home case – at page 132 E-G. Lord Bridge identified the need, first, to find "at any time prior to acquisition, or exceptionally at some later date . . . an agreement, arrangement or understanding reached between them that the property is to be shared beneficially". He went on:

Once a finding to this effect is made it will only be necessary for the partner asserting a claim to a beneficial interest against the partner entitled to the legal estate to show that he or she has acted to his or her detriment or significantly altered his or her position in reliance on the agreement in order to give rise to a constructive trust or a proprietary estoppel.

10. Sir Nicholas Browne-Wilkinson, Vice-Chancellor, had expressed the same view as to the common foundation on which proprietary estoppel and this class of constructive trust are based in Grant v Edwards [1986] Ch 638. At page 656 G-H, in a passage to which Lord Justice Robert Walker was to refer in Yaxley v Gotts, the Vice-Chancellor said this:

I suggest that in other cases of this kind, useful guidance may in the future be obtained from the principles underlying the law of proprietary estoppel which in my judgment are closely akin to those laid down in Gissing v Gissing [1971] AC 886. In both, the claimant must to the knowledge of the legal owner have acted on the basis that the claimant has or will obtain an interest in the property. In both, the claimant must have acted to his or her detriment in reliance on such belief. In both, equity acts on the conscience of the legal owner to prevent him from acting in an unconscionable manner by defeating the common intention. The two principles have been developed separately without cross-fertilisation between them: but they rest on the same foundation and have on all other matters reached the same conclusions.

11. Sir Nicholas Browne-Wilkinson, Vice-Chancellor, went on, at page 657 A-D, to consider the extent to which the burden was on the claimant to establish the link between the acts done by the claimant and her belief that she had, or would obtain, an interest in the property. He said this:

As at present advised, once it has been shown that there was a common intention that the claimant should have an interest in the house any act done by her to her detriment relating to the joint lives of the parties is, in my judgment, sufficient detriment to qualify. The acts do not have to be specifically referable to the house . . . The holding out to the claimant that she had a beneficial interest in the house is an act of such nature to be part of the inducement to her to do the acts relied on. Accordingly, in the absence of evidence to the contrary, the right inference is that the claimant acted in reliance on such holding out and the burden lies on the legal owner to show that she did not do so: see Greasley v Cooke [1980] 1 WLR 1306.

The decisions at first instance

12. With those principles in mind, I turn to examine the first instance decisions in which equity has imposed a constructive trust on property acquired by one person in furtherance of some arrangement or understanding with another that, by keeping out of the market, that other would, nevertheless, be able to acquire some interest in the property. The principal cases are Chattock v Muller (1878) 8 ChD 177, Pallant v Morgan [1953] Ch 43, Holiday Inns Inc v Broadhead (unreported, 19 December 1969; and, at trial, (1974) 232 EG 951), Time Products Limited v Combined English Stores Group Limited (unreported, 2 December 1974) and Island Holdings Limited v Birchington Engineering Limited (unreported, 7 July 1981).
13. In Chattock v Muller (1878) 8 ChD 177 the defendant, whose estate immediately adjoined a property which was to be offered for sale by auction, agreed with the plaintiff, who was a prospective purchaser interested in that property, that only one of them should bid; and that, if that bid were successful, the property should be divided between them. In the event, the defendant bid at the auction, but was unsuccessful. The property was bought in by the vendor at the reserve price. Subsequently the parties came to a further oral arrangement, under which the defendant was to buy the property if he could by private contract; and, if he did so, the plaintiff would have from him the mansion house and the eighty or ninety acres which he wanted. On 4 July 1876 the defendant wrote to the plaintiff that he had had an offer from the auctioneer; adding "I have held off more in your interest than in mine, but you are quite at liberty to offer for the property". The plaintiff replied that, in the light of the defendant's letter he would not think of making an offer or interfering in any way. The defendant purchased the property; but, having decided to keep it for his son, refused to convey any part to the plaintiff. The plaintiff claimed specific performance. He was met with the defence that the arrangement was too uncertain – in that, it was said, there was no certainty as to the part of the property that the plaintiff was to have or the price that he was to pay for it. At the close of argument, Sir Richard Malins, Vice-Chancellor, reserved judgment on the issue of certainty; but a note to the report, at page 180, records that:

. . . the Vice-Chancellor intimated his opinion that the Defendant had lulled the Plaintiff into not making an offer for the estate; that the letter of the 4^th of July was conclusive that the Defendant was all the time leading the Plaintiff to believe that if he bought the property the Plaintiff should have the part he wanted. Otherwise he ought to have told the Plaintiff not to rely upon him, and that if he wanted any part of the estate he must bid in competition with him; and that having, so to speak, warned the Plaintiff off from the purchase, the Defendant was, in his opinion, no longer at liberty to change his mind; that there was clearly an arrangement that the Defendant was to buy the estate so far as he wanted it, for himself, and so far as he did not want it, for the Plaintiff; so that if the agreement had been to buy the whole estate for the benefit of the Plaintiff, the Defendant could not have bought it for himself, he would have been a trustee . . .

14. When he came to give judgment the Vice-Chancellor was satisfied that the uncertainty could be resolved by reference to a memorandum and plan, on the basis of which the original, pre-auction, arrangement had been made; but, as is clear from his observations at the close of argument, he would have been willing to overcome any lack of certainty if he had found it necessary to do so. In the course of his judgment he said this, at pages 181-2:

It is clear that the Defendant attended the auction partly on his own account and partly as the Plaintiff's agent, and if he had then purchased the estate, he must have been held to be a trustee for the Plaintiff of the house and the eighty or ninety acres which it had been arranged that he should have. The subsequent negotiations were treated as carried on by the Defendant on behalf of himself and the Plaintiff, and he treated the purchase as a joint purchase in various letters until the 25^th of July, when he appears to have become enamoured with the estate, and astonished the Plaintiff by his letter of that date, in which he assumed to be the owner of the estate, part of which he had unquestionably purchased as the agent of the Plaintiff. This was a flagrant breach of duty, which in this court has always been considered as a fraud: . . .

But it was strongly argued . . . for the Defendant, that the Plaintiff cannot have a decree because there was no certainty as to what part of the estate the Plaintiff was to have, or as to the price to be paid for it. In a case like this, where the Defendant has acquired the estate or part of it by a fraud on the Plaintiff, I think that the court would be bound, if possible, to overcome all technical difficulties in order to defeat the unfair course of dealing of the Defendant, and I should not, in my opinion, be going too far if I compelled the Defendant to give the whole estate to the Plaintiff at the price given for it, rather than that he should succeed in retaining it on account of any uncertainty as to the part which the Plaintiff is entitled to have. But I think the memorandum in the handwriting of the Defendant, which was given to the Plaintiff at the interview of the 20^th of June, relieves the Court in this case from any difficulty.

15. Although Sir Richard Malins, Vice-Chancellor, was able to satisfy himself, on the facts in Chattock v Muller, that there was a memorandum in writing which contained, with sufficient certainty to satisfy the Statute of Frauds, the terms of the agreement between the parties, it is plain that it was not the existence of the memorandum which led him to treat the defendant as a trustee of the property. The defendant was a trustee because, having "so to speak, warned the Plaintiff off from the purchase", he was no longer to be allowed, in equity, to treat the property as his own. The defendant had led the plaintiff to think that, if he did not compete with him for the property, the defendant would deal with the property (when acquired) for their common benefit. In reliance on that understanding the plaintiff had refrained from attempting to acquire the property for himself. It would be unconscionable for the defendant, having acquired the property in those circumstances, to act inconsistently with the understanding on which the plaintiff had relied.
16. Chattock v Muller was applied, some seventy five years later, in Pallant v Morgan [1953] Ch 43. The plaintiff and the defendant, neighbouring landowners, were each concerned to protect nearby woodland (which they did not own). On learning that the woodland was to be offered at auction, they sought to agree which parts each should acquire; on the basis that, if agreement could be reached, they would not compete against each other at the auction. No concluded agreement was reached before the day of the auction. Their agents met at the sale. The plaintiff's agent had instructions to bid up to £2000 for lot 16; the defendant's agent had instructions to bid up to £3000 for that lot. It was agreed between the agents that the plaintiff's agent would refrain from bidding for lot 16 on the basis that the defendant's agent would bid for both lot 16 and lot 15 (in respect of which he also had instructions). The agents agreed that, if the defendant acquired both lots at the auction, he would sell on to the plaintiff part of lot 16 (marked "A" on a plan) – save to the extent (if any) which that part affected certain water rights about which the defendant was concerned - and also part of lot 15 (marked "C" on the plan). The price was to be ascertained in accordance with a formula which had been agreed in the course of earlier discussions; but that formula had itself left the values of land and timber on which it was based to be agreed. In the event, the defendant's agent bought both lot 15 and lot 16 at the auction; the latter for a sum which was less than that to which the plaintiff's agent had had instructions to go, if he had been bidding. The defendant refused to convey any part of the land to the plaintiff. The plaintiff sought specific performance of the agreement; alternatively, a declaration that the defendant held the property in trust for himself and the plaintiff jointly and an order for sale.
17. Mr Justice Harman held, at page 48 in the report, that there could be no order for specific performance. There was too much left to be agreed. There was the margin between £3 and £5 an acre for the land; there was the exact method of valuing the timber; and there was the question what part, if any, of portion "A" affected the defendant's water rights. But he went on:

Is the result then that the plaintiff must fail? In my judgment not so. To allow the defendant to retain lot 16 under these circumstances would be tantamount to sanctioning a fraud on his part . . .

18. Mr Justice Harman then referred to the judgment of Sir Richard Malins, Vice-Chancellor, in Chattock v Muller (1878) 8 ChD 177, 181-2, which I have already set out, and said this, at [1953] Ch 43, 50:

The present case is, if anything, stronger than that one, but I do not follow the Vice-Chancellor in his suggestion that the defendant could become bound to hand over the whole property to the plaintiff at the price he gave for it. In my judgment, the proper inference from the facts is that the defendant's agent, when he bid for lot 16, was bidding for both parties on an agreement that there should be an arrangement between the parties on the division of the lot if he was successful. The plaintiff and the defendant have failed to agree on a division, and the court cannot compel them to agree. The best it can do is to decree that the property is held by the defendant for himself and the plaintiff jointly, and, if they still fail to agree on a division the property must be re-sold, either party being at liberty to bid, and the proceeds of sale divided equally after repaying to the defendant the £1,000 which he paid with interest at 4 per cent.

It is true that the suggested agreement would have involved the transfer to the plaintiff of a portion of lot 15, but, in default of an agreement, he cannot obtain that, for his agent had no instructions to bid for that lot in any event.

19. It is, I think, important to note three points. First, that the plaintiff did not, in fact, suffer any detriment as a consequence of his agent's agreement not to bid for lot 16. If the plaintiff's agent had bid for that lot, up to the amount (£2000) prescribed by his instructions, he would have been outbid by the defendant's agent, whose instructions permitted him to go to a substantially higher figure (£3000). But the defendant obtained an advantage from the agreement. By keeping the plaintiff out of the market his agent was able to obtain lot 16 for £1000; whereas, if he had been bidding against the plaintiff's agent, he would have had to go to a figure in excess of £2000. Second, that the trust did not attach to any part of lot 15, notwithstanding that portion "C", which had been included in the arrangement made between the agents, was within that lot. The reason, as Mr Justice Harman explained, was that the plaintiff had done (or omitted to do) nothing in relation to lot 15. He had not refrained from bidding for lot 15 in reliance on any assurance from the defendant. On the facts, he had already decided not to bid for that lot before any assurance was given by the defendant's agent at the auction. So the plaintiff suffered no detriment in relation to lot 15; and the defendant obtained no advantage in relation to that lot. It was not enough that the plaintiff had been led to think that he would obtain an interest in lot 15 if he refrained from bidding for lot 16.
20. Third, it is important to note that the plaintiff's claim to an interest in lot 16 was not defeated by the fact that, as the judge found, his agent knew at the time when he refrained from bidding that the arrangement which had been reached that day left certain details to be agreed. Mr Justice Harman, after referring to a letter written by the plaintiff's agent after the auction, said this:

It was urged upon me that this [letter] showed that the plaintiff's agent knew that there had been no agreement before the sale. I think it does show that he realized that the details of the agreement had been left in doubt, but this, in my judgment, is not fatal to the plaintiff's case, which rests on the fact that his agent was kept out of the ring at the auction by a promise that, if he did not bid, an agreement would be reached.

21. As Mr Justice Millett put it, when commenting upon Pallant v Morgan in the course of a discussion of the principles upon which equity acts in cases of this nature in Lonrho Plc v Fayed (No 2) [1992] 1 WLR 1, at page 10B-C:

The plaintiff's claim [in Pallant v Morgan] rested on the fact that his agent had been kept out of the bidding by the arrangement which the defendant later repudiated. Since it was too late to restore the plaintiff to his former position, the defendant was held to the arrangement he had made.

22. In Holiday Inns Inc v Broadhead (1974) 232 EG 951 the plaintiff company – a major international hotel operator – entered into discussions with the defendant, Mr Broadhead, with a view to a joint venture in relation to a hotel to be constructed on a site near Heathrow Airport. The joint venture was to take the form of an arrangement under which the hotel company would construct the hotel on land owned by Mr Broadhead (or a company which he controlled) in return for a lease (described as a "3 and 1 lease") under which the rent payable by the hotel company would be the relevant percentage (3 per cent or 1 per cent respectively) of gross accommodation receipts and gross food and beverage receipts. The initial discussions took place at a time when the only site which Mr Broadhead could offer was a five acre site. That site was less than satisfactory to the plaintiff company; and, with a view to meeting its requirements, Mr Broadhead acquired an option over a neighbouring fifteen acre site. The plaintiff company spent time and money in seeking planning permission in relation to that fifteen acre site. In the event planning permission was granted following an appeal to the Minister and a public inquiry. The position thereafter was described by Mr Justice Goff in the following passage of his judgment, at page 953:

The plaintiff's case is that they did all this and incurred this expenditure on the faith of a firm understanding, arrangement or bargain which they all at material times believed existed between them and Mr Broadhead that if planning permission could be obtained he would grant them a 3 and 1 lease of the 15-acre site on the standard terms. They say that Mr Broadhead knew this and nevertheless encouraged or allowed them to go on under this belief, and yet when permission had been obtained he would not grant them such a lease, but required terms much more favourable to himself, and although they went a long way to try to meet him, and indeed probably would have reached an agreement on the lines he was requiring, he suddenly broke off these new negotiations and caused a lease of the 15-acre site to be granted to Trust Houses Group Ltd. Thus they say Mr Broadhead took an unconscionable advantage of them, and while they never suggested that the understanding, arrangement or bargain was sufficiently precise to be enforceable as a contract, they claim to be entitled to relief in equity. Mr Broadhead's case on this main issue is not that no such equity exists. Indeed, Mr Waite [counsel for Mr Broadhead] very properly conceded in argument that it does in proper cases, but he submits that there was here no such understanding, arrangement or bargain as would enable to plaintiffs to succeed.

23. The proceedings had come before Mr Justice Megarry on an application for interlocutory relief. In a judgment delivered on 19 December 1969 (unreported) he referred to Chattock v Muller and Pallant v Morgan; and to a passage in Fry on Specific Performance (6^th Edition, page 184, paragraph 386) which had, itself, been set out at page 48 in Pallant v Morgan. In relation to Mr Justice Harman's decision in the latter case he said this, at page 9 of the transcript:

First, the decision seems to me to go a good deal farther than Chattock v Muller or Fry on Specific Performance. The opening sentence in the quotation from Fry appears in Part III of the book, entitled "Defences to the Action", that is, the action for specific performance, and in Chapter IV of that part, entitled "Uncertainty of the Contract". When, then it is said that "The same certainty will not be required in cases where there is any element of fraud, as in simple cases of specific performance of a contract", that sentence and the following word, "Thus", indicate that what follows is a case where specific performance will be decreed, despite a lesser degree of certainty. In fact, in Pallant v Morgan specific performance was in terms refused. Instead, as I understand it, the court enforced against the defendant an innominate equity of an entirely different nature. In place of the agreement for division which the parties failed to make, equity compelled the defendant who had acquired the property to hold it not for himself alone, but for himself and the plaintiff; and in default of any other basis the property was held for the parties in equal shares, presumably on the basis that equality is equity. If Chattock v Muller represents the requirements of specific performance being modified in the case of fraud, Pallant v Morgan represents the substitution of an alternative remedy for specific performance. The doctrine is interesting and important and, had circumstances permitted, I should have preferred to have taken time to consider my judgment.

Second, I would not regard equality as being of the essence of the Pallant v Morgan equity. If, for instance, the arrangement between the parties is for a division in other fractions, such as one-quarter and three-quarters, or one-tenth and nine-tenths, and specific performance is impossible because too much of the detail is left undecided, I do not see why equity should not make a Pallant v Morgan decree in corresponding fractions, such as are well known in the case of joint purchases made with purchase money that has been provided in unequal shares. Where a reasonable certainty as to the fractions is unattainable then no doubt equity will delight in equality. In the case before me the disparity and uncertainty in the interests of lessor and lessee in respect of a lease with rents varying with the takings of a hotel would, I think, in the absence of valuation evidence as to the values of the respective interests, indicate equality as the basis of the equity.

24. Mr Justice Megarry rejected the submission that Pallant v Morgan had been wrongly decided. He said this, at page 11B-C:

It seems to me that if A and B agree that A shall acquire some specific property for the joint benefit of A and B on terms yet to be agreed, and B, in reliance on A's agreement, is thereby induced to refrain from attempting to acquire the property, equity ought not to permit A, when he acquires the property, to insist on retaining the whole benefit for himself to the exclusion of B. If on the facts it would be inequitable for the quantum of B's interest to be a moiety, I do not doubt that equity could determine what justice required the quantum to be; but where the facts suggest no other basis, then there should be equality.

25. He went on to express the view, subsequently voiced by Sir Nicholas Browne-Wilkinson, Vice-Chancellor in Grant v Edwards [1986] Ch 638 and by Lord Justice Robert Walker in Yaxley v Gotts [1999] 3 WLR 1217, that the Pallant v Morgan equity had much in common with proprietary estoppel, as exemplified in Ramsden v Dyson (1866) LR 1 HL 129 and the other cases in that line of authority.
26. Holiday Inns Inc v Broadhead came on for trial, some three years later, before Mr Justice Goff. His judgment is reported at (1974) 232 EG 951. He adopted the analogy with proprietary estoppel. He said this:

In my judgment the authorities clearly establish that there is a head of equity under which relief will be given where the owner of property seeks to take an unconscionable advantage of another by allowing or encouraging him to spend money, whether or not on the owner's property, in the belief, known to the owner, that the person expending the money will enjoy some right or benefit over the owner's property which the owner then denies him. This arises where the person expending the money does so under a mistaken belief that the property is his own, that belief being known to the other, as in Ramsden v Dyson (1866) LR 1 HL 129, but mistake is not an essential element of a claim to relief of this nature. The authorities also establish, in my judgment, that this relief can be granted although the arrangement or understanding between the parties was not sufficiently certain to be enforceable as a contract, and that the court has a wide, albeit of course judicial, discretion as to what extent relief should be given and what form it should take. These principles are in my judgment plainly deducible from the case just cited and the cases of Plimmer v Wellington Corporation (1884) 9 App Cas 699; Inwards v Baker [1965] 2 QB 29; Ward v Kirkland [1967] Ch 194, in which the authorities, including Plimmer's case, were very thoroughly and carefully reviewed by Ungoed-Thomas J; Pallant v Morgan [1953] Ch 43, and the recent case in the Court of Appeal, Hussey v Palmer [1972] 1 WLR 1286. There has been much questioning what is the rationale of this equity, and even in Hussey's case that exercise was not finally completed. Lord Denning at p 1290 said:

In those cases it was emphasised that the court must look at the circumstances of each case to decide in what way the equity can be satisfied. In some by an equitable lien. In others by a constructive trust. But in either case it is because justice and good conscience so require.

Phillimore LJ, on the other hand, said at p 1291:

I should have thought it was more appropriate to regard it as an example of a resulting trust.

I do not think it matters, really. The principle on which it rests is clearly, as Lord Denning said, "because justice and good conscience so require" and the cases fully show the conditions which have to be satisfied to give rise to it, and as I have said, they leave a wide discretion in the court.

27. It may be noted that Mr Justice Goff includes Pallant v Morgan in the line of cases which, as he says, clearly establish the head of equity under which he is to grant relief.
28. The principal issue at the trial in Holiday Inns Inc v Broadhead was whether the plaintiff company was entitled to rely on any assurance that it would obtain an interest in the fifteen acre site in circumstances in which it knew that there was no concluded agreement. That reflects an issue in the present case. The first ground upon which Mr Justice Blackburne held against Banner on the constructive trust point was, as he put it, because:

I do not see how equity can turn a common arrangement or understanding, which is implicitly qualified by the right of either side to withdraw, into an unqualified arrangement or undertaking which denied any such right.

It is relevant, therefore, to see how Mr Justice Goff viewed the point. This appears from the following passage in his judgment:

Mr Waite therefore rested his case on what he described, and rightly described as the crucial question whether there was present a belief on the part of the plaintiffs, induced by Mr Broadhead's words or silence, that they would receive a sufficient interest in the land to justify the expenditure. He said this was an arrangement between commercial men dealing with each other at arm's length with their eyes open, and so the plaintiffs must be taken to have elected as a matter of commercial judgment to run the risk that Mr Broadhead might, as I add he clearly did, have private reservations undisclosed at the date of the expenditure which might frustrate the conclusion of the anticipated bargain, and indeed that they might have had similar reservations themselves. I am wholly unable to draw any such inference or conclusion. Mr Wilson's evidence, which I accept, was that he thought this was a gentleman's agreement which would be honoured. Mr Tigrett in his evidence, which I also accept, said that no reservations or thought of backing out ever occurred to him, and the whole tenor of Mr Broadhead's conduct and letters was calculated to make the plaintiffs believe that if planning permission were obtained they would have a straight 3 and 1 lease on the standard terms. I am satisfied and find as a fact that both Mr Wilson and Mr Tigrett believed that and Mr Broadhead well knew that they did. His failure to inform them of his true state of mind was deceitful and unconscionable.

29. A further feature of the Holiday Inns case was the need of Mr Broadhead, as the person who was to acquire the option over the fifteen acre site – and, subsequently, the site itself – for the support of a joint venturer if the potential of the site were to be realised. Mr Justice Goff explained the position in the following passage:

It is clear that Mr Broadhead had no real chance of securing planning permission himself. He needed the support of an hotelier, and he encouraged the plaintiffs to lend them theirs. The application was put before the local authority and fought before the Minister's inspector on the basis that the plaintiffs would run an hotel on the site, and much reliance was placed on their expertise and their American connection which should bring in American tourist trade. It was suggested another hotelier might have served instead, but no other was contemplated, and I need not consider whether another would or would not have succeeded in obtaining planning permission. I have to take the case as it is and consider the position which in fact obtained.

30. Mr Justice Goff was satisfied that the hotel company had made out a case calling for the intervention of equity within the principles laid down in the cases to which he had referred. In working out that equity, he adopted the principle of equal division, after allowing each party credit in respect of their actual expenditure.
31. Shortly after Mr Justice Goff's decision in the Holiday Inns case, similar issues arose before Mr Justice Oliver in Time Products Limited v Combined English Stores Limited (unreported, 2 December 1974). The claim arose out of the acquisition by the first defendant ("CES") of the business of retail jewellers formerly carried on by the Collingwood Group Limited ("Collingwoods"). The plaintiff ("TP") was, itself, engaged in the wholesale and retail jewellery trade and was also interested in acquiring the Collingwoods' business. TP's claim was that it had agreed not to offer for the Collingwoods' business in competition with CES on the understanding that, following acquisition by CES, the business would be run as a joint venture for the benefit of both CES and TP. The crucial meeting took place on 14 June 1972. As Mr Justice Oliver put it, at page 10D-E in the transcript of his judgment:

The events and discussions which took place at this meeting have formed the storm-centre of the controversy which has arisen between the parties, and one of the difficulties of this case is that I have to choose between two diametrically opposed accounts from prima facie reliable witnesses of the real substance of the meeting with but scant assistance from any contemporary document or record.

After a detailed examination of the evidence, he reached the following conclusions, at pages 105F-106D:

Accordingly, I find that there was reached on the 14^th June 1972 an agreement between T.P. and C.E.S. that Collingwoods should, if possible, be acquired at the lowest possible price as a joint venture in equal shares, the business so acquired to be conducted under T.P's management for the joint benefit of the parties.

. . .

I find that the actions of the parties subsequent to the meeting in or about the negotiations [with the vendor's agents] leading up to the acquisition by C.E.S. were done in pursuance of that common understanding.

And I find that it was in reliance upon this and in the belief (which was known to Mr Gordon [the chairman of CES]) that the C.E.S. bid was being advanced on behalf of both parties that T.P. desisted itself from pursuing further negotiations with Mr Kellner [the vendor's agent] and thus enabled C.E.S. to acquire Collingwoods at the price at which it was acquired.

In the light of those findings, Mr Justice Oliver went on to say this, at page 106G-107G:

What then is the result? The plaintiffs claim specific performance of the agreement. This, however, raises immediate difficulties, for the agreement made bristles with practical questions of definition. In particular how is effect to be given to the term – an essential term – that the management of the joint enterprise should lie with T.P?

Was a company to be formed on the board of which T.P's nominees were to have voting control? Was T.P. to have the controlling voice in the appointment of each shop manager? Was T.P. to take all management staff into its employ? And was the management to be carried out by T.P. free of charge or was some and if so what management fee to be charged in the accounts between the parties? . . . This really underlines the uncertainty of the agreement alleged – a difficulty which clearly oppressed Mr Hayman [counsel for TP] when he came to address me on the law applicable. There are, as it seems to me, so many imponderables in the broad agreement to which the parties came that it is really impossible for the court to see with precision what is to be performed and to give the necessary directions. Nor does it seem to me that these imponderables are matters which can be cured by reference to Chambers as was done by Vice-Chancellor Malins in Chattock v Muller, (1878) 8 Chancery Division, page 177; for in the instant case this would involve not finding out for certain what the agreement was, but making for the parties an agreement that they did not make for themselves.

On the other hand it would be clearly inequitable to permit the defendants to retain the whole fruits of an acquisition made in these circumstances. . . .

32. Mr Justice Oliver then referred to the passages in the judgments of Mr Justice Harman in Pallant v Morgan and of Mr Justice Megarry and Mr Justice Goff in Holiday Inns Inc v Broadbent which I have already set out. He went on, at page 114E-115F:

Mr Sparrow [counsel for CES] has submitted that this case [the Holiday Inns case] is not directly in point. It was, he says, directed to a rather different state of affairs where A induces B into some expenditure by encouraging an erroneous belief that a certain state of affairs exists. The instant case, he says is not such a case and had not been pleaded as such. It is, of course, true that in the instant case, it has not been pleaded that the plaintiffs acted upon any erroneous belief encouraged by the defendants. But I am far from convinced that the case is so readily distinguishable from that before Mr Justice Goff on those grounds. The principle applicable is in my judgment the same. In this case (as indeed in Pallant v Morgan itself) the plaintiffs' case is, in a sense, a strong one, for they say there was no erroneous belief. There was a perfectly correct belief. There was an agreement. And in reliance on that agreement they did, with the defendants' concurrence, perform services for the defendants. Whether those services were, as Mr Gordon alleges, of little value is, in my judgment, immaterial, although, as I have said I am far from convinced that they were as valueless as he has asserted.

They did perform them and he did accept them and make use of them. More important he obtained from them the details of their offer from U.K.P. [the vendors and he obtained the benefit of their abstaining from further pursuing their own negotiations. All this was not on the erroneous basis that an agreement existed. It was performance of the agreement. I cannot, however, see why this should make any difference to the principle applicable.

It is a fraud in the defendant to retain for himself the benefit of the bargain obtained with the plaintiffs' assistance whether that assistance was obtained by the defendant through the plaintiffs' erroneous belief in a given state of facts or through a promise, contractual or otherwise, given by the defendant. It is, in my judgment, equally unconscionable for the defendants, having reaped the benefit of the transaction, now to seek to retain the property and to disregard the rights which under the agreement the plaintiffs stipulated even though the agreement may lack certainty or be a mere gentlemen's agreement not enforceable as a contract.

It was on that basis that Mr Justice Oliver, as he said at page 116G, applied the principle of Pallant v Morgan to the facts in the Time Products case and declared that the business of Collingwoods was, and had been at all times since 12 September 1972 (the date on which the business was acquired by a CES subsidiary), vested in that subsidiary (the second defendant to the proceedings) upon trust for TP and CES in equal shares.

33. We were referred, also, to the decision of Mr Justice Goulding in Island Holdings Ltd v Birchington Engineering Co Ltd (unreported, 7 July 1981). In that case the parties had agreed that each would tender (in apparent competition) for the grant of a long lease of land owned by the local authority; but that the defendant's tender would be the higher of the two. On the basis that those tenders would lead to the grant of the lease to the defendant, the parties agreed in writing that the defendant would sell part of the demised premises to the plaintiff. The defendant's tender was accepted by the local authority; but, before any lease was granted, the local authority indicated that it was willing to offer the freehold of the site at a small extra cost and the defendant accepted that offer. The defendant then offered the plaintiff the freehold (in place of a leasehold interest) of the part of the site which it had been agreed the plaintiff was to have, again at a small extra cost. The plaintiff accepted that offer "subject to contract". The parties failed to agree on the grant of certain rights of way; and the defendant withdrew from further negotiations. The plaintiff sued for specific performance of the original agreement, varied (as alleged) to take account of the offer of the freehold. The judge held that that contractual claim must fail; on the basis that the original agreement had been discharged and replaced by a new agreement which was subject to contract and so unenforceable. But he held in favour of the plaintiff on an alternate equitable claim.
34. Mr Justice Goulding does not appear to have been referred to Pallant v Morgan – although he was referred to Holiday Inns v Broadhead – and his reasoning does not follow closely the analysis in the judgments of Mr Justice Megarry and Mr Justice Goff in the latter case. But the principle which he applied is familiar. At page 21C-E in the transcript of his judgment he said this:

I am well aware that among the siren songs with which hard cases tempt judges onto the fatal coasts of bad law one of the most seductive is the song whose words tell of unjust enrichment and whose music is the plaintive melody of constructive trust. Nevertheless, I am in the end of opinion that it is contrary to justice and good conscience that the defendant retain for itself the whole benefit of the site which it obtained in consequence of a joint venture whereby the plaintiff forewent its original opportunity of competing for any chance of acquiring that site.

He gave effect to that view by treating the defendant as trustee of the site for the plaintiff and itself. It is pertinent to note that he did not seek to give effect to the original agreement – under which the plaintiff was to have a defined portion of the site at a price equal to three-fifths of the price which the defendant was to pay the local authority – but held that they should be entitled to the property in equal shares, credit being given to the defendant by way of charge for the acquisition costs which it had borne.

The Pallant v Morgan equity

35. I have thought it appropriate to analyse the decisions at first instance in more detail than might otherwise have been necessary in the circumstances that the present appeal provides the first opportunity, so far as I am aware, for this Court to consider the basis and scope of what may be called the Pallant v Morgan equity in a case in which it reliance has to be placed upon it by the appellant. In my view there is no doubt that such an equity does exist and is firmly based. It is an example of the wider equity to which Mr Justice Millett referred in Lonrho Plc v Fayed (No 2) [1992] 1 WLR 1, at pages 9H-10A:

Equity will intervene by way of constructive trust, not only to compel a defendant to restore the plaintiff's property to him, but also to require a defendant to disgorge property which he should have acquired, if at all, for the plaintiff. In the latter category of case, the defendant's wrong lies not in the acquisition of the property, which may or not have been lawful, but in his subsequent denial of the plaintiff's beneficial interest. For such to be the case, however, the defendant must either have acquired property which but for his wrongdoing would have belonged to the plaintiff, or he must have acquired property in circumstances in which he cannot conscientiously retain it against the plaintiff.

Or, as the same judge was to say in this Court, in the passage in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, at page 408j-409d, to which I have already referred:

His [the defendant's] 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.

36. It is important, however, to identify the features which will give rise to a Pallant v Morgan equity and to define its scope; while keeping in mind that it is undesirable to attempt anything in the nature of an exhaustive classification. As Mr Justice Millett pointed out in Lonrho v Fayed (No 2), at page 9C, in a reference to the work of distinguished Australian commentators, equity must retain its "inherent flexibility and capacity to adjust to new situations by reference to mainsprings of the equitable jurisdiction". Equity must never be deterred by the absence of a precise analogy, provided that the principle invoked is sound. Mindful of this caution, it is, nevertheless, possible to advance the following propositions:

(1) A Pallant v Morgan equity may arise where the arrangement or understanding on which it is based precedes the acquisition of the relevant property by one of those parties to that arrangement. It is the pre-acquisition arrangement which colours the subsequent acquisition by the defendant and leads to his being treated as a trustee if he seeks to act inconsistently with it. Where the arrangement or understanding is reached in relation to property already owned by one of the parties, he may (if the arrangement is of sufficient certainty to be enforced specifically) thereby constitute himself trustee on the basis that "equity looks on that as done which ought to be done"; or an equity may arise under the principles developed in the proprietary estoppel cases. As I have sought to point out, the concepts of constructive trust and proprietary estoppel have much in common in this area. Holiday Inns Inc v Broadhead may, perhaps, best be regarded as a proprietary estoppel case; although it might be said that the arrangement or understanding, made at the time when only the five acre site was owned by the defendant, did, in fact, precede the defendant's acquisition of the option over the fifteen acre site.

(2) It is unnecessary that the arrangement or understanding should be contractually enforceable. Indeed, if there is an agreement which is enforceable as a contract, there is unlikely to be any need to invoke the Pallant v Morgan equity; equity can act through the remedy of specific performance and will recognise the existence of a corresponding trust. On its facts Chattock v Muller is, perhaps, best regarded as a specific performance case. In particular, it is no bar to a Pallant v Morgan equity that the pre-acquisition arrangement is too uncertain to be enforced as a contract – see Pallant v Morgan itself, and the Time Products case – nor that it is plainly not intended to have contractual effect – see Island Holdings Ltd v Birchington Engineering Co Ltd.

(3) It is necessary that the pre-acquisition arrangement or understanding should contemplate that one party ("the acquiring party") will take steps to acquire the relevant property; and that, if he does so, the other party ("the non-acquiring party") will obtain some interest in that property. Further it is necessary, that (whatever private reservations the acquiring party may have) he has not informed the non-acquiring party before the acquisition (or, at the least, before it is too late for the parties to be restored to a position of no advantage/no detriment) that he no longer intends to honour the arrangement or understanding.

(4) It is necessary that, in reliance on the arrangement or understanding, the non-acquiring party should do (or omit to do) something which confers an advantage on the acquiring party in relation to the acquisition of the property; or is detrimental to the ability of the non-acquiring party to acquire the property on equal terms. It is the existence of the advantage to the one, or detriment to the other, gained or suffered as a consequence of the arrangement or understanding, which leads to the conclusion that it would be inequitable or unconscionable to allow the acquiring party to retain the property for himself, in a manner inconsistent with the arrangement or understanding which enabled him to acquire it. Pallant v Morgan itself provides an illustration of this principle. There was nothing inequitable in allowing the defendant to retain for himself the lot (lot 15) in respect to which the plaintiff's agent had no instructions to bid. In many cases the advantage/detriment will be found in the agreement of the non-acquiring party to keep out of the market. That will usually be both to the advantage of the acquiring party – in that he can bid without competition from the non-acquiring party – and to the detriment of the non-acquiring party – in that he loses the opportunity to acquire the property for himself. But there may be advantage to the one without corresponding detriment to the other. Again, Pallant v Morgan provides an illustration. The plaintiff's agreement (through his agent) to keep out of the bidding gave an advantage to the defendant – in that he was able to obtain the property for a lower price than would otherwise have been possible; but the failure of the plaintiff's agent to bid did not, in fact, cause detriment to the plaintiff – because, on the facts, the agent's instructions would not have permitted him to outbid the defendant. Nevertheless, the equity was invoked.

(5) That leads, I think, to the further conclusions: (i) that, although, in many cases, the advantage/detriment will be found in the agreement of the non-acquiring party to keep out of the market, that is not a necessary feature; and (ii) that, although there will usually be advantage to the one and co-relative disadvantage to the other, the existence of both advantage and detriment is not essential – either will do. What is essential is that the circumstances make it inequitable for the acquiring party to retain the property for himself in a manner inconsistent with the arrangement or understanding on which the non-acquiring party has acted. Those circumstances may arise where the non-acquiring party was never "in the market" for the whole of the property to be acquired; but (on the faith of an arrangement or understanding that he shall have a part of that property) provides support in relation to the acquisition of the whole which is of advantage to the acquiring party. They may arise where the assistance provided to the acquiring party (in pursuance of the arrangement or understanding) involves no detriment to the non-acquiring party; or where the non-acquiring party acts to his detriment (in pursuance of the arrangement or understanding) without the acquiring party obtaining any advantage therefrom.

The present appeal

37. With these considerations in mind, I turn to the issues raised in the present appeal. The significant findings of fact, in the context of the constructive trust claim, are these:

(1) That, in March 1995, Luff began looking for a joint developer or partner (in addition to the sub-purchaser, Hewland) with whom to bid for the site. Luff was keen to acquire the site, but preferred to share the risk of the acquisition – given the substantial amount involved, the speculative nature of the acquisition and the still uncertain state of the commercial property market. It was in that context that Luff was introduced to Banner. [Transcript, page 3, line 36, to page 4, line 7].

(2) That, by 14 July 1995, Banner and Luff had reached agreement in principle for the purchase and development of the site through a single enterprise company which was to be jointly owned. [Transcript, page 12, line 16 to page 14, line 16]

(3) That, following that agreement, Stowhelm – an "off the shelf" company - was acquired by Luff as the corporate vehicle for the purchase and development of the site and with the intention that it should be the joint venture company. [Transcript, page 16, lines 4-9].

(4) That, although by mid-October Luff had begun to have second thoughts over the wisdom of having Banner as a joint venture partner – and was looking for another partner – those second thoughts were never mentioned to Banner. Banner was to be "kept on board . . . until someone or something better turned up". Luff was aware that "if dropped, Banner might emerge as Luff's rival for the site". [Transcript, page 26, lines 38-40, page 27, lines 8-10, page 28, lines 34-37].

(5) That, as late as 27 October 1995, (shortly before the exchange of contracts with the vendors of the site) it was clear that both sides intended to enter into the shareholder agreement as soon as possible; there was no indication that any difference of principle existed between them. [Transcript, page 35, line 25].

38. The judge summarised those findings in two passages in his judgment which I have already set out. First, at page 69, lines 36-40, he referred to:

Banner's belief, encouraged by Luff's conduct and representations leading up to and in the days following exchange of contracts for the White Waltham site on 1 November, that the joint venture proposal was proceeding and that there would be a formal agreement setting out the terms of their relationship . . .

Secondly, at page 74, lines 17-19, he said this:

. . . from 14 July until 16 November (if not later) Luff gave Banner to understand that there would be a joint venture and that it intended to enter into a shareholder agreement to regulate their relationship . . .

39. In my view the judge misunderstood the principles upon which equity intervenes in cases of this nature when he held that "Banner's hope and expectation, however much Luff may have encouraged it, that a formal agreement would be entered into following which Banner would discharge the obligations and take the benefits arising under the joint venture" could not "give rise to the common arrangement or understanding which is a necessary foundation for the establishment of the equity". He was wrong to reject the constructive trust claim on the grounds that Banner was seeking to invoke the assistance of equity in order to "turn a common arrangement or understanding, which is implicitly qualified by the right of either side to withdraw, into an unqualified arrangement or undertaking which denied any such right". The Pallant v Morgan equity does not seek to give effect to the parties' bargain, still less to make for them some bargain which they have not themselves made, as the cases to which I have referred make clear. The equity is invoked where the defendant has acquired property in circumstances where it would be inequitable to allow him to treat it as his own; and where, because it would be inequitable to allow him to treat the property as his own, it is necessary to impose on him the obligations of a trustee in relation to it. It is invoked because there is no bargain which is capable of being enforced; if there were an enforceable bargain there would have been no need for equity to intervene in the way that it has done in the cases to which I have referred.
40. I am satisfied, also, that the judge was wrong to reject the constructive trust claim on the grounds that Banner had failed to show that it had acted to its detriment in reliance on the arrangement agreed on 14 July 1995. There was evidence, to which I have referred, that the existence of the arrangement led Banner to regard the site as "out of play"; that is to say, the existence of the arrangement made it unnecessary, and inappropriate, for Banner to consider the site as a potential acquisition for its own commercial portfolio. But, as the judge himself recognised, one of the reasons why Luff wanted Banner kept "on board" – and so did not disclose its own doubts as to the future of the joint venture – was that, "if dropped, Banner might emerge as a rival for the site". In other words, Luff saw it as an advantage that Banner's belief that the site was out of play should be maintained. Luff wanted to keep Banner out of the market. In those circumstances, it does not lie easily in Luff's mouth to say that Banner suffered no detriment. But whether or not Banner suffered detriment from the fact that it never regarded itself as free to consider the site as a potential acquisition of its own does not seem to me conclusive. Luff obtained the advantage which it sought. Further, Luff obtained the advantage of knowing that it had Banner's support, as a potential joint venturer whose commitment was not in doubt, in an acquisition on which it had not been willing to embark on its own.
41. As I have sought to show, the Pallant v Morgan equity is invoked where it would be inequitable to allow the defendant to treat the property acquired in furtherance of the arrangement or understanding as his own. It may be just as inequitable to allow the defendant to treat the property as his own when it has been acquired by the use of some advantage which he has obtained under the arrangement or understanding as it is to allow him to treat the property as his own when the plaintiff has suffered some detriment under the arrangement or understanding. That, as it seems to me, is this case.
42. For those reasons I would allow this appeal. In the circumstances that it was always in contemplation that a single enterprise company – which, in the event, was Stowhelm – should acquire the site as its own asset, so that the parties should participate as the holders of shares in that company rather than as the joint owners of the site itself, my present view is that the appropriate order is that sought in the notice of appeal; namely, that the shares in Stowhelm are held, as to one half, upon trust for Banner. If necessary, I would order a sale of all the shares in Stowhelm held by Luff and a division of the proceeds. But I am conscious that there may have been dealings in the shares in Stowhelm since the acquisition of the site; and (if the parties cannot agree on the appropriate form of order in the light of the decision of this Court) I would think it right to hear further submissions on that question before reaching a concluded view.

LORD JUSTICE EVANS:

I agree.

LORD JUSTICE STUART-SMITH:

I also agree.

Order: Appeal allowed; counsel to draft and lodge a minute of order.

(Order does not form part of approved judgment).