The Brocklesbury principle: postponing an owner’s rights to those of a later lender or purchaser

In Credit and Mercantile plc v Kaymuu Ltd ([2015] EWCA Civ 655) S, W and E were three businessmen who acted as a consortium to carry out property development ventures. There was no formal written agreement between them and they operated on the basis of trust. They agreed to distribute between themselves the proceeds of sale of shares in a company used as the vehicle for one of their ventures. It was agreed that W’s share would be used to finance the purchase of a house (Dalhanna) for occupation by W as his family home. W left all the arrangements for the purchase to S. The property was acquired and W went into occupation. Unknown to W, S had arranged for the property to be acquired by Kaymuu Ltd, a company wholly controlled by S. There was a short interval in the time between the transfer of title to Kaymuu and its registration at the Land Registry. In that interval, S arranged for Kaymuu to grant a charge to C & M in return for a loan of GBP500,000 which S took for himself. S went into bankruptcy and C & M sought possession of the property.

At first instance, W was found to have a beneficial interest under a Pallant v Morgan equity. W argued that his occupation, discoverable on a reasonably careful inspection of the land at the time of the disposition, meant that his interest was an overriding interest and that C & M was subject to it (Land Registration Act 2002, s. 29). This failed; W was prevented from having a right enforceable against C & M by virtue of the Brocklesbury principle (see Brocklesbury v Temperance Permanent BS [1895] AC 173). Sales LJ explained the principle thus:

‘The Brocklesby principle is not based on actual authority given to the agent, but rather on a combination of factors: actual authority given by the owner of an asset to a person authorised to deal with it in some way on his behalf; where the owner has furnished the agent with the means of holding himself out to a purchaser or lender as the owner of the asset or as having the full authority of the owner to deal with it; together with an omission by the owner to bring to the attention of a person dealing with the agent any limitation that exists as to the extent of the actual authority of the agent. This combination of factors creates a situation in which it is fair, as between the owner of the asset and the innocent purchaser or lender, that the owner should bear the risk of fraud on the part of the agent whom he has set in motion and provided (albeit unwittingly) with the means of perpetrating the fraud. The same principle applies where the dishonest vendor or mortgagor of the asset, who by the sale or mortgage raises money from an innocent third party, has been vested with the legal title as a trustee’ ([52])

The principle, which was the basis for the ruling in Abbey National Building Society v Cann, applied in the present case. W had given S authority to act on his behalf in relation to the purchase; S was given the freedom to make whatever arrangements he saw fit to effect the purchase and W exercised no supervision over S’s arrangements. W gave S the means to hold himself out to C & M as the true owner ([57]). As a result, ‘[W] was precluded by operation of the Brocklesbury principle from maintaining that he had a beneficial interest in relation to Dalhanna with potential to have priority over the security interest of C & M’ ([58]).

Michael Lower

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The precursor of Pallant v Morgan

In Chattock v Muller ((1878) L.R. 8 Ch.D. 177) C and M agreed that M would buy land and that M would then convey part of the land to C. Just before approaching the owner to make an offer, M contacted C to inform him of his intention. He told C that he was free to make his own offer but C replied that he would not do so in light of the understanding between C and M. In fact, an approach was made to M by the owner of the land the next day. M acquired the land and informed C that he intended to keep it for himself. M argued that there could be no agency agreement because the precise extent of the land to be conveyed to C had not been identified (although there was substantial agreement on this).The court appears to have taken the line that this was an agency agreement and that in fact there was no uncertainty. There was an order to determine the land to be conveyed.

The court held that even if there were a problem as to certainty, equity could assist C.  Malins V.C. said that if need be he would be prepared to order M to convey the entire estate to C. Equity could prevent M from unconscionably relying on the lack of certainty so as to defeat his obligations under that agreement:

‘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’. (per Malins V.C. at 181).

Bribes: what kind of constructive trust?

Secretary for Justice v Hon Kam Wing ([2003] 1 HKLRD 524) concerned an action by the Hong Kong Government to recover what it alleged to be bribes and property paid for with those alleged  bribes. They had been received not later than 1971 and the Government knew of them by 1976 but did not bring proceedings until March 2000. There was a question as to whether the action was time-barred by the provisions of sections 4(1)(a) and 4(2) of the Limitation Ordinance. It was accepted on both sides that the bribes, if such they were, would be held on constructive trust. But what kind of constructive trust was it? The court had to apply Lord Millett’s distinction between ‘real’ constructive trusts and situations where someone is made accountable as if they were a constructive trustee (Paragon Finance Plc v DB Thakerar & Co). The court decided that this was a ‘real’ constructive trust with the result that there was no limitation period. The crucial pointer to this conclusion was that the recipient of the alleged bribes held them on trust for the employer as soon as they were received (para. 62).

Auction: pre-agreement that only one party will bid for each lot: conspiracy to defraud?

In HKSAR v Chan Wai Yip ((2010) 13 HKCFAR 842) the Government’s Food and Environmental Hygiene Department (‘FEHD’) organised an auction of cooked food stalls at a new market. The people invited to bid had been stall holders at an old market (presumably the new one replaced the old). The bidders made arrangements to ensure that only one of them would bid for each stall. As a result, each stall went for its reserve price. The bidders had been sent in advance the rules for the conduct of the auction; one of these provided that the participants would not influence any other person with regard to bidding for a stall. The bidders were all successful but were then convicted of conspiracy to defraud in the Magistrates Court and sentenced to terms of imprisonment. This was overturned by the Court of Appeal and the Government appealed to the Court of Final Appeal. This appeal failed: the pre-auction agreement did not amount to a conspiracy to defraud.

The Government’s case was that the FEHD had been deceived into thinking that there was only one bid for each lot and so renting the stalls out at the bid price. But the FEHD had not been deceived into anything.The CFA referred to the definition of conspiracy to defraud in Mo Yuk Ping v HKSAR.

Sir Anthony Mason NPJ summarised the relevant English jurisprudence on such agreements: ‘there is strong English authority to support the proposition that an agreement by potential buyers not to bid at an auction .. in order to keep the price down, is neither unenforceable as being contrary to public policy nor criminal.’  Sir Anthony Mason went on to point out that such an agreement was assumed to be legal in Pallant v Morgan.

The Court of Final Appeal certainly did not seek to approve or endorse the type of agreement in question; it merely concluded that this agreement did not amount to a conspiracy to defraud. It acknowledged that the agreements could be criticised on the grounds that they are, ‘dishonest and anti-competitive and strike at the very essence of a competitive auction.’ (para 74).

Invoking Pallant v Morgan to secure the right to participate in a proposed new venture

Alan Hoo v Benjamin Lung ([2007] 3 HKLRD 169, CA) concerned a proposal to establish an Italian restaurant in Shanghai. The plan was to replicate a successful Italian restaurant in Hong Kong. There had been three shareholders of the company that owned the Hong Kong restaurant. They fell out and the shares in the company through which they ran the Hong Kong business were sold to another company.The three shareholders then entered into an agreement with each other pursuant to which H (one of the shareholders) would have ‘not more than 30% beneficial interest’ in a new company to be set up to pursue the Shanghai project. Offers were later made to H to allow him to participate but they were not acceptable to him. H sought, among other remedies, an injunction to prevent the use of the name of the Hong Kong restaurant in Shanghai and damages for breach of contract and breach of fiduciary duty or an account of profits. H argued that at the time of the relevant agreement, the plans for the Shanghai restaurant had been at an advanced stage but that they had subsequently been departed from in significant ways that made participation unattractive.

The claim for breach of contract failed for the simple reason that, properly understood, the agreement gave H no say in whether or how the Shanghai project was to be executed. H also sought to invoke the Pallant v Morgan equity. The Court of Appeal considered the elements of the equity as identified by Chadwick LJ in Banner Homes. None of them were satisfied in this case. Any pre-acquisition agreement there may have been had been superseded by the later formal written agreements between the parties. It was not envisaged that any of the parties to the agreement would acquire the Shanghai property; rather a new company was to acquire the property. H had been offered the opportunity to participate; he had turned these offers down without making any counter-offers. He claimed that this was because the concept had changed from that which he had expected but the concept was work in progress and liable to change. (Perhaps this is significant if the ‘concept’ is considered to be the relevant property. The Court of Appeal would then be saying that even the loose definition of the property required by Pallant v Morgan had not been satisfied).

The Pallant v Morgan equity and competitive bidding

In Thames Cruises Ltd v George Wheeler Launches Ltd ([2003] EWHC 3093 (Ch)) the defendants and the claimant operated boat services on the Thames. They were members of an Association that participated in a competitive bidding process for the renewal of the Pier Licence needed for the operation of their services. At the last minute, the defendants informed the claimant that they had formed a rival consortium that was also going to bid. The defendants had legitimate concerns about the claimant’s contribution to the bid but they did not inform the claimant of these concerns until soon before the date for submitting the bids. The new consortium’s bid was successful. Peter Smith J held that the agreement of the defendants to submit a joint bid with the claimants gave rise to a Pallant v Morgan equity. The defendants had not informed the claimant of their concerns and rival bid until it was too late for the claimant to respond. Thus, the claim to a Pallant v Morgan equity succeeded.

Membership of rival bidding consortia

In Button v Phelps ([2006] EWHC 53 (Ch)) P signed on 9th May contractually binding heads of terms to participate in a consortium headed by B (Ryeheath) that would bid for certain commercial properties. At the same time, he was a member of and working for a rival consortium intending to bid for the same properties. On 23rd May P made it clear that he was not part of the Ryeheath consortium and he had no duty towards Ryeheath after that date. Neither of these consortia was successful; the successful bidder was another consortium of which P was a member that participated in a second round of bidding. B claimed damages for breach of contract (essentially to recover the wasted costs of the Ryeheath bid). That claim succeeded.

B’s further claim for an account of profits (based on breach of fiduciary duty or on the Pallant v Morgan equity) failed. It is interesting to see that the court took the view that these were separate potential sources of an equitable claim and that the Pallant v Morgan equity is a constructive trust. The fiduciary duty claim failed because P never undertook to act on behalf of Ryeheath or its members: he had been assigned no clear role by the heads of terms (paras. 60- 61). In any event, there could be no liability to account because there was no link between the alleged breach and the profit made by participating in a later-formed consortium that bid in the second round (para. 66). The Pallant v Morgan claim failed because of the lack of the relevant pre-acquisition arrangement or understanding and because of the lack of advantage / detriment.

Committed to a joint venture?

In Kilcarne Holdings Ltd v Targetfellow (Birmingham) Ltd ([2004] EWHC 2547 (Ch)) T had the benefit of an agreement for lease. It needed a substantial sum of money to allow it to complete the agreement. Otherwise, it ran the risk that the agreement would be terminated and it would forfeit substantial sums of money already paid under the agreement. It entered into negotiations with K. As a first stage, finance was provided by K under the terms of loan agreements. It had been envisaged that, in due course, the loan agreements would be replaced by a joint venture agreement and that this agreement would instead set out the commercial terms between the parties. The negotiations concerning the terms of the joint venture agreement were not concluded. K claimed that there was a contract binding the parties to enter into the joint venture agreement. Failing that, it claimed (inter alia) to be entitled to invoke the Pallant v Morgan equity, proprietary estoppel or to be entitled to payment on a quantum meruit basis. It failed in all of its claims.

The parties had envisaged a joint venture agreement, it was true, but also that this would be incorporated in a formal agreement. They had no intention to create a legal obligation to enter into a joint venture on the basis of the ‘agreeements’ reached in the course of negotiations. In any event, the agreement concerned land and it did not comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Cases that suggest an oral partnership agreeement concerning land is possible have been overtaken by section 2. Further, neither of the individuals negotiating for K and T had authority to conclude the contract (though K may be taken to have ratified any such agreement had it existed).

The Pallant v Morgan claim failed for a variety of reasons. The loan notes set out the terms of the agreement and equity’s help was being sought to vary the terms of a concluded legal contract (in respect of which there was no claim to rectification). The existence of a complex set of contracts made the intervention of equity unnecessary (para. 236). There was no arrangement or understanding for the purposes of the equity. There was a side letter to the legal agreements in which T made clear that its obligation went no further than to negotiate in good faith concerning the joint venture. That K had not read this could not be held against T. There was no advantage to T or detriment to K (which profited from the loan agreements in place) for the purposes of the equity. There was no causal link between any suggestion of a joint venture and T’s subsequent actions.

There was no proprietary estoppel because (like Pridean) expectations of a joint venture agreement were understood to be conditional on concluding negotiations and incorporating them into a formal contract.  The quantum meruit claim failed because T never asked K to provide any services.

Attempting to invoke the Pallant v Morgan equity to overcome lack of agency or partnership

In National Trust for Places of Historic Interest v Birden ([2009] EWHC 2023) N and B entered into a share farming agreement from 1995 to 2004. B was to farm N’s land and the profit was to be divided between them. The arrangement was entered into to avoid creating a tenancy. It was agreed that each party was carrying on its own business and that there was no agency or partnership. The judge was happy to accept that this reflected the true nature of the parties’ relationship. The agreement provided that any government subsidies paid would be shared between them. When the agreement ended B moved to another farm not owned by N. In the meantime, the nature of the subsidy paid to farmers changed as a result of EC legislation. B claimed the subsidy he was entitled to in respect of the new farm to which he had moved. His period of managing N’s farm was an important part of his entitlement to the claim in respect of the new farm (the claim was for subsidy for the period after the share farming agreement had ended). N made its own claim for subsidy for the same period (which began after the end of the share farming agreement) and B completed certain forms in an attempt to assist. The government refused to pay N since it did not meet the statutory criteria. N then asked B to hand over part of the payment that he had received on the basis that it was partly attributable to the time that he had spent farming on N’s farm. Thus, N argued, it fell within the requirement to share subsidies.

The court found that the payment was not caught by the subsidy-sharing clause in the agreement. N argued that the agreement showed that there was a common intention that such payments should be shared and that a common intention constructive trust (along the lines of the Pallant v Morgan equity as explained in Banner Homes) came into effect. This failed too. This was an attempt to argue that the share farming agreement amounted to a joint venture and the court found that there was no ‘joint venture’ (para. 157). There was nothing unconscionable about B’s retention of the entire amount of the subsidy he had received.

‘Subject to contract’ and the Pallant v Morgan equity

In London & Regional Investments Ltd v TBI plc ([2002] EWCA Civ 355, CA (Eng)) L bought TBI’s property portfolio by way of a share sale and purchase. The sale agreement included a clause to the effect that, after completion, the parties would use their reasonable endeavours to agree the terms of a joint venture for the development of land at two airports (one site was owned by TBI and TBI had an option concerning the other site). The outline terms of the proposed joint venture were set out in a note attached to the share sale agreement. The note was headed ‘subject to contract’. L & R claimed that this note reflected an earlier understanding between the parties and that it paid more for the shares than it would otherwise have done because of its expected profit from the joint venture. It claimed that the joint venture was integral to the entire deal and that only lack of time had prevented the completion of a formal binding joint venture. Summary judgment was given for TBI at first instance and the English Court of Appeal concurred: even if one accepted L & R’s version of events, its claim must fail.

L & R sought to invoke the Pallant v Morgan equity but the fact that the agreed note of the joint venture terms in the share sale agreement was headed subject to contract was fatal. It showed that there was no underlying agreement to share the relevant sites through the joint venture:

‘L & R seeks to invoke equity not to counter unconscionable conduct by one party which would defeat the informal understanding of both parties, but to reverse the effect of the express agreement they have made and replace it with state of affairs (sic) (joint ownership of the land with no joint development) which was never contemplated.’ (per Mummery LJ at para. 48).