ON APPEAL FROM CHANCERY DIVISION
Mr Justice Morgan
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE ETHERTON
LORD JUSTICE MCFARLANE
| CROSSCO NO.4 UNLIMITED & ORS
|- and -
|JOLAN LIMITED & ORS
Mr Romie Tager QC and Mr Justin Kitson (instructed by Addleshaw Goddard LLP) for the Respondent
Hearing dates : 1st November 2011
Crown Copyright ©
Lord Justice Etherton :
"We have now finalised the commercial agreement between each "side". This note sets out these final changes some of which may affect the documents. I appreciate that the timetable is tight but we would prefer to stick to it if at all possible. The markets are so volatile that delay kills deals."
"Gill's side will now get the freehold in Manchester Piccadilly, with an assignment of the lease to the trading side or a new lease on the same terms and with the existing rent but with Gill getting vacant possession of the upper floors. We may have to do the freehold now and follow up later with the lease. I imagine that the property will be ? left in crossco and demerged with Gill's other assets to avoid stamp duty. The value for commercial purposes will be £5m, it may be possible to get a lower value if SDLT is in point."
"Following yesterday's demerger meeting I obtained a copy of the lease from Phil Thompson.
On checking the documentation the current area demised to ops is the whole building. If the agreement is that ops will just have the ground floor we will need to have a brief deed of variation to attach a new demise plan limiting rights of occupation to the ground floor. We will also need to vary the rights of repair to make the landlord responsible for the external repairs and include a % recovery clause in based on floor area. If ops to occupy just 1 floor this will probably be circa 20% based on the 5 floors.
If you could please consider these points and if all agree I will ask Dickinson Dees to draft the necessary deed of variation for completion along with the rest of the demerger papers.
Look forward to hearing from you with your instructions."
"We … confirm and agree that we shall agree to a reduction of the extent of the demise created by the Lease in the following manner and subject to the following conditions:
1. To reduce the extent of the demise created by the Lease to the ground floor of the Property together with such additional areas (if any) as you shall reasonably specify;
2. To effect such reduction by means of a deed of surrender or such other means as you shall reasonably require;
3. Notwithstanding the reduction in the extent of the demise the rent payable under the Lease shall remain at the level passing thereunder at the date at which such reduction takes place;
4. No consideration shall be payable by you to us for such surrender or variation;
5. Neither party shall be released from any existing breaches of the terms of the Lease notwithstanding the surrender or variation of the Lease save that we shall not enforce against you any breach of your obligation under the Lease to maintain and/or repair those parts of the Property which are to be removed from the area demised to you in accordance with the terms of this letter ;
We confirm and agree that the terms of this letter will bind our successors in title to our interest under the Lease."
The main proceedings
The Judge's judgment
"89. In his witness statement, Philip Noble gave only brief evidence about the discussion relating to the building at this meeting. He said that the proposal was that the building would go to Gill's side and that the Trading Group would continue to run its business from the ground floor with the upper floors being released to Gill, so that she could redevelop them. The value at which the building would go to Gill's side would be £5 million. The Trading Group would pay for the ground floor the same rent that it currently paid for the whole building. "
90. When cross-examined, Philip Noble stated that the proposal was that Gill would have the upper floors for redevelopment and that Philip Noble would keep the ground floor to trade from. He later changed his evidence to refer to the ground floor and basement. He said that he would pay the same rent for the ground floor and basement as he had been paying for the whole building. He did not know if there would be a new lease of the ground floor and basement. He expected that his company would occupy under a lease. He believed that, after the meeting, thought would have to be given to the practicalities of splitting the building and shared exits. The discussion was in very broad terms. Later in his evidence he said that, depending on what Gill's side wanted to do with the upper floors, his side would accommodate that in any way possible. Nothing was said about the duration of the lease of the ground floor and basement; he imagined that if there had been an existing lease, the duration of the lease of the ground floor and basement would have been however long that lease had to run."
"96. Philip Noble agreed to Mr Barnsley's proposal that the freehold of the building would be transferred to Gill's side. There was no discussion as to the legal steps to be taken to achieve that. Philip Noble and Mr Barnsley agreed that the freehold would be transferred in return for a value shift of £5 million. The parties did not discuss in any detail how that figure of £5 million was derived or how it was to be justified. The fact that the same figure had appeared in the Colliers CRE valuation as a value of the freehold with vacant possession was not referred to.
97. The proposal involved, either expressly or by implication, the arcade business continuing on the ground floor. There was no discussion about what use would be made of the basement but it was contemplated that the basement would be available for use by Philip's side. The proposal involved the upper parts of the building not being occupied by Philip's side so that those parts would be available for Gill's side. There was no discussion as to the precise extent of the ground floor which would be occupied by the arcade business.
98. Philip Noble proposed that he would pay the same rent for the ground floor and basement as the business had been paying for the whole building. However, he later said that he would want to check up the position as to rent.
99. The parties at the meeting did not know whether there was an existing lease of the building. It was expected that Philip's side would occupy the ground floor and basement under a lease but it was not known whether that would be the existing lease or a new lease. The question of the duration of any lease was not considered. No one referred to the fact that the existing lease contained a break clause. Similarly, the other terms of any lease were not considered.
100. Finally, I find that at the meeting on 18th February 2009, there was only a passing reference to a future development of the upper parts of the building."
"Considering the probabilities of the situation at the time, I find that anyone in the position of Mr Dalzell and Mr Wooldridge would have thought that it was highly likely, perhaps even inevitable, that Philip's side would have been aware of the break clause. They knew that Philip's side had a copy of the lease in their records. Mr Dalzell had had to go to Mr Thompson to get a copy of the lease for Gill's side. They also knew that Philip's side knew that Mr Dalzell had been looking at the lease. The two sides began discussing the question of whether to have a deed of variation or a new lease. That would tend to suggest that Philip's side would be looking at the lease. On 20th February 2009, Gill's side were told that Mr Biesterfield had become involved in connection with the question whether there should be a deed of variation or a new lease. Gill's side were told that Mr Biesterfield had expressed a view to Mr Horrocks on that point. Mr Biesterfield was, and was known to be, a careful and punctilious lawyer. He demonstrated those attributes when he raised points about the lease of the Palatine in the period before completion of the demerger. Mr Biesterfield also asked for the side letter in relation to the building to be amended so that there was to be a release from the repairing covenant. That suggested that Mr Biestefield was aware of the terms of the lease."
"223. In my judgment, the parties did not make a contractually binding agreement on 18th February 2009. There was no overall contract dealing with all of the demerger matters discussed on 18th February 2009 and there was no specific contract dealing with the building on its own. Indeed, the Claimants do not contend that there was a separate contract in relation to the building if I am not prepared to find that there was an overall contract dealing with all the matters discussed on 18th February 2009. I will give my reasons for holding that there was no binding contract in relation to the building arrived at on 18th February 2009 before giving my reasons as to why there was no binding contract on any subject arrived at on that date.
224. On 18th February 2009, the building was only briefly discussed. A brief discussion does not necessarily mean that no contract was arrived at, but this brief discussion did not, even in general principle, settle a large number of matters which were essential to be settled before a binding contract would be made. At that meeting, the parties did not know whether there was an existing lease. They did not agree anything in relation to an existing lease, such as a variation of such a lease. They did not agree upon the grant of a new lease, as they did not know if there was an existing lease. They did not agree on the extent of the premises which would be occupied by Philip's side. It was clear that that extent would not include the upper parts of the building. It was thought that it would include all or part of the basement. It was thought that it would include part, but not all, of the ground floor. The parties knew that they would need to discuss and agree at a later time which part of the ground floor would remain available to Philip's side. They did not agree a formula, which was sufficiently certain to have contractual effect, as to how the extent of the ground floor was to be determined, for example by an independent person or by the court, if the parties could not agree. Thus, the extent of the part of the building which was to be occupied by Philip's side was contractually uncertain. The length of time that Philip's side would be entitled to occupy the relevant part of the building was not even mentioned. If the parties had known at the meeting on 18th February 2009 that there was an existing lease, it might have been possible to infer that they must have contemplated that the duration of the entitlement would be governed by the terms of the existing lease. That result would not have particularly helped Philip's side as the duration of the existing lease was itself governed by the break clause in the lease. Further, the parties did not know whether it would be necessary or appropriate to enter into a new lease of the relevant part of the ground floor and they had not discussed what the term of any such lease might be. In addition, the parties did not agree the rent which would be payable for the relevant part of the building. Philip Noble said that he wanted to have confirmation from Mr Thompson as to whether it was appropriate to continue to pay the existing rent for the relevant part, although Philip Noble indicated at the meeting that he was in principle prepared to pay that rent.
225. In my judgment, the only possible conclusion in relation to the alleged contract, or contractual terms, in relation to the building is that there was no binding agreement in relation to the building…"
"244. The simple fact is that the Claimants made their mistake because they did not read the lease in circumstances where it was to be expected that they would and where the Defendants had no reason to think that they had not read the lease and had missed the fact that it contained a break clause. This is not an unprecedented state of affairs, as is demonstrated by the facts of The Nai Genova  1 LL R 353 at 365-366. …"
"245. I will now attempt to apply the approach in Chartbrook in this case. I am to ask whether the contract as executed in the present case "correctly reflected the prior consensus": see per Lord Hoffmann at . I have therefore to consider whether there was some expression of consensus prior to 10th March 2009 when the parties expressed themselves in a way which was different from the terms of the contract of 10th March 2009 and/or the transfer of 9th April 2009. In my judgment, there was no earlier expression of the consensus of the parties which differed from the terms of the executed documents. The parties did not at any earlier point refer to the existence of the break clause nor to the duration of Piccadilly's entitlement to remain as lessee of the premises. The executed documents are not different from what the parties said and wrote to each other between 18th February 2009 and 10th March 2009 or 9th April 2009; the executed documents faithfully give effect to those communications. The mistake that the Claimants made was that they were unaware of the existence of the break clause. That is no doubt why the Claimants' first two submissions in support of a claim to rectification stressed that mistake on their part. One result of that being the mistake was that there was simply no earlier expression of the parties' consensus which when objectively construed and compared with the terms of the executed documents shows a disparity between the executed documents and the earlier consensus. "
"336. I will first consider whether there was an express representation or assurance of the kind alleged at the meeting on 18th February 2009 or in the communications from that date up to 10th March 2009. I have set out my detailed findings as to what was said at the meeting on 18th February 2009. The arrangement discussed appeared to involve Philip's side continuing to trade from most of the ground floor (at that stage, together with the basement). However, the duration of any entitlement to continue was not discussed. The parties did not know whether there was an existing lease and they did not know the length of the remaining term of any existing lease. They did not know that the existing lease contained a break clause. I am not able to find that anything that was said amounted to an express representation or assurance that Philip's side could remain on the ground floor for the remainder of the length of the term of the existing lease and without the break clause.
337. I have set out in detail the communications between the parties between 18th February 2009 and 10th March 2009. Those communications are open to two interpretations. One is that Gill's side indicated to Philip's side that Philip's side could have a lease in the same terms as the existing lease, save that the premises demised by the lease would be reduced in extent to part of the ground floor only. The other interpretation is that Gill's side indicated to Philip's side that Gill's side was prepared, following the demerger, to negotiate with Philip's side the terms of a new lease. Neither of these interpretations of the communications amounts to a representation or assurance that Philip's side could remain on the ground floor for the remainder of the length of the term of the existing lease and without the break clause. The difficulty for Philip's side was that they, by mistake, had overlooked the existence of the break clause in the existing lease but that was not as a result of any representation from Gill's side that the existing lease did not have a break clause nor was there anything amounting to an assurance from Gill's side that they would not seek to rely upon the break clause.
338. I will next consider whether the discussion on 18th February 2009 and/or the communications between 18th February 2009 and 10th March 2009 amounted to an implied representation or assurance that Philip's side could remain on the ground floor for the remainder of the length of the term of the existing lease and without the break clause. I have referred to what was said at the meeting and to the two possible interpretations of the communications thereafter. In my judgment, there is no basis for holding that the statements made by Gill's side carried with them an implied representation or assurance from Gill's side to that effect. As before, Philip's side mistakenly believed that they had a lease without a break clause but that was not the result of anything from Gill's side.
339. The Claimants also say that the agreed value shift for the purposes of the demerger, to reflect the fact that Philip's side was acquiring a business, which included the business in the building, carried with it an implied representation or assurance that the business would be able to continue in the building for some period or other. Philip's side would contend that the relevant period is the remainder of the term of the existing lease but, of course, not subject to the break clause.
340. The Claimants submit that the way in which the valuation of the overall business was arrived at by Close Brothers supports the Claimants' contention. They say that Close Brothers would probably not have arrived at the same valuation if they have been told that there was a significant risk that at some indefinite time in the future the carrying on of the business at the building might cease without being relocated. I accept that it is probable that the Close Brothers valuation would have been lower by an amount that, on the evidence, I am not able to quantify. However, that does not seem to me to be enough to support a finding that Gill's side, by agreeing on values by reference to the Close Brothers valuation, were representing to Philip's side that Philip's side had, or would be given, an entitlement to occupy the ground floor for any particular period of time.
341. It will be remembered that Mr Wells gave evidence that the Close Brothers valuation did not have regard to the period of the leases of the various properties. If one were to investigate what Close Brothers were told about the tenure in relation to the building, it would emerge that the schedule of properties given to Close Brothers stated that the building was held on a freehold and not on a lease. In my judgment, Philip's side cannot argue that negotiations as to price based on the Close Brothers report amounted to an implied representation by Gill's side that Philip's side would have a freehold tenure of the building. If that is so, then I do not see how such negotiations could be said to amount to a representation by Gill's side that Philip's side would enjoy any specific period of tenure following demerger.
342. I have also held that the actual discussions between the parties from 18th February 2009 to 10th March 2009 did not expressly or by implication involve a representation or assurance of the kind alleged. In those circumstances, in my judgment, the way in which the parties negotiated the value of the overall business, which included the business carried on at the building, did not involve any such representation or assurance, expressly or by implication."
"349. In my judgment, this is not a case of an expectation created or encouraged by Gill's side that Philip's side would, as a result of a deed of variation or the grant of a new lease, end up with a lease which was more than a short term lease. Philip's side believed, wrongly, that they already had something which was more than a short term lease. As to any future deed of variation or new lease, Philip's side knew that they had no legal entitlement to such a deed of variation or new lease. On 23rd February 2009, the parties deliberately agreed that they would not have further negotiations about the deed of variation or a new lease. Philip's side did not want to settle the extent of the ground floor until they were clear as to the effect of a revised demise on the premises licences for "split areas". Further, the side letter which allowed Philip's side to give up part of the building, to avoid liability for the empty parts of the building, was clearly expressed to be something which was not legally binding. In my judgment, and in accordance with the decision in Cobbe, Philip's side cannot say that they have a right in equity to a deed of variation or a new lease, without a break clause, when it was expressly agreed between the parties that the terms of a deed of variation or a new lease depended upon the outcome of future negotiations."
"351. I accept that the demerger transaction was not a totally arms-length commercial transaction. However, there were clearly two sides with different and competing interests. Each side was entitled to protect its own interests and expect the other to look after itself. I do not think that the family connections and the use of one set of advisers ultimately changed the nature of the duties owed by one side to the other side. In particular, I do not think that one side owed fiduciary obligations to the other. It was suggested during the cross-examination of some of the witnesses that Mr Barnsley might have owed fiduciary obligations, or some other duty, to Philip Noble. It was also suggested in the course of the evidence that, prior to demerger, while a company was owned jointly by Gill's side and by Philip's side, a director of such a company owed duties to the ultimate shareholders; if that proposition were correct, it would be said that, for example, Mr Dalzell owed a duty to Philip Noble.
" 353. As regards the submission that the parties were expected to trust each other, I do not think that Gill's side behaved in an untrustworthy or tricky way prior to the demerger. Gill's side behaved properly in proposing the terms which were agreed in principle on 18th February 2009. I do not think that Gill's side caused Philip's side to make a mistake about the break clause in the lease. I do not think that Gill's side set out to trap Philip's side in that respect. I do not think that Gill's side ought to have reminded Philip's side of the break clause in circumstances where Gill's side had no reason to think that Philip's side was making a mistake. Accordingly, whatever was called for in relation to trustworthy behaviour from Gill's side, I find that Gill's side are not at fault in any such respect. "
"351. Standing back, the position is a simple one. The parties were content for the freehold to be transferred to Gill's side and for the question of the lease of the ground floor to be considered later, with neither party binding itself in relation to future negotiations as to the lease. Philip's side were content to proceed in that way because they believed they had a satisfactory lease of the whole building. They were mistaken about the lease because, in fact, it was subject to a three month break clause. That mistake was not attributable to any representation or assurance from Gill's side. Gill's side did not cause Philip's side to make this mistake. Gill's side did not even know that Philip's side was making this mistake. Gill's side did not commit itself by a promise or assurance about their future conduct as to any negotiations about a deed of variation or a new lease, nor as to the extent of any development. Philip's side did not rely on any such promise or assurance; they relied on their mistaken belief as to their rights under the existing lease. There is nothing there to raise an equity against Gill's side. "
"368. In connection with the alleged constructive trust, the following factors seem to me to be important:
(1) Philip's side made a unilateral mistake about the terms of the existing lease;
(2) the mistake was not induced by any representation or assurance from Gill's side;
(3) the mistake was not caused, or contributed to, by Gill's side;
(4) Gill's side did not know that Philip's side was making a mistake;
(5) Philip's side knew that they did not have a binding agreement for a deed of variation or a new lease;
(6) Philip's side did not rely upon the prospect of there being a binding agreement for a deed of variation or a new lease;
(7) Philip's side relied upon the existing lease but in the mistaken belief that the existing lease was not subject to a break clause.
369. When considering a possible argument as to estoppel by convention, I referred to the fact that there was some element of common assumption in this case, namely, that in February and March 2009, both parties expected that any future development by Gill's side would be restricted to a development of the upper parts of the building. I have therefore considered whether it might have been argued that a constructive trust arose in the present case whereby, in some way or other, Gill's side would be prevented from relying upon the break clause in the lease to recover possession of the ground floor of the building for the purposes of redevelopment. In my judgment, there was no constructive trust which operated in that way. First of all, the way in which I have described the submission is not an assertion of a constructive trust but is really an assertion of an estoppel; I have already explained why I think that there was no estoppel of that kind. Secondly, the parties did not discuss in any detail what the extent of any future development might be; Philip's side did not rely upon any such discussion or any promise or representation about the extent of such a development, because there was no such promise or representation. What Philip's side relied upon was its belief as to its rights under its existing lease. Philip's side mistakenly overlooked the break clause in that lease but that mistake was not attributable to the conduct of Gill's side and Gill's side did not even ap/preciate that Philip's side was making a mistake.
370. In my judgment, it is not unconscionable for Gill's side, following demerger, to assert the existence of their freehold title and to rely upon the terms of the existing lease. It does not seem to me to matter that the parties did not in fact, after 9th April 2009, pursue negotiations as to a deed of variation or a new lease in relation to most of the ground floor of the building. If there had been such negotiations, Gill's side would have been entitled to insist upon the break clause remaining in the varied lease, or in the new lease, relating to the ground floor, as Gill's side had not bound itself by a contract or an estoppel or a trust to act otherwise."
The Respondents' Notice
"(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 party 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 , 232 E.G. 951 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 15-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 8 Ch.D. 177 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  Ch. 43 itself, and Time Products Ltd. v. Combined English Stores Group Ltd. , 2 December 1974 - nor that it is plainly not intended to have contractual effect - see Island Holdings Ltd. v. Birchington Engineering Co Ltd., 7 July 1981.
(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, perhaps more accurately, 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  Ch. 43 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 correlative 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."
"A particular factual situation where a constructive trust has been held to have been created arises out of joint ventures relating to property, typically land. If two or more persons agree to embark on a joint venture which involves the acquisition of an identified piece of land and a subsequent exploitation of, or dealing with, the land for the purposes of the joint venture, and one of the joint venturers, with the agreement of the others who believe him to be acting for their joint purposes, makes the acquisition in his own name but subsequently seeks to retain the land for his own benefit, the court will regard him as holding the land on trust for the joint venturers. This would be either an implied trust or a constructive trust arising from the circumstances and if, as would be likely from the facts as described, the joint venturers have not agreed and cannot agree about what is to be done with the land, the land would have to be resold and, after discharging the expenses of its purchase and any other necessary expenses of the abortive joint venture, the net proceeds of sale divided equally between the joint venturers."
"Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such trust having arisen (including the possibly unfair consequences to the third parties who in the interim have received the trust property) are also determined by rules of the law, not under a discretion. A remedial constructive trust… is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court."
"24. It is unnecessary to go further. On the facts of this case it is difficult, if not impossible, to discern any material difference between the application of the Gissing v Gissing and Pallant v Morgan principles. For myself, I would have thought that it was the former that fitted the case better than the latter. But whether that be right or wrong it is clear that, if the case is not covered by the former, it will not be covered by the latter."
"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 as 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. Well known examples of such a constructive trust are McCormick v Grogan (1869) 4 App.Cas. 82 (a case of a secret trust) and Rochefoucald v Boustead  1 Ch. 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan  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."
Lord Justice McFarlane
Lady Justice Arden