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Last Updated: 3 December 2019
F W Guest Memorial Lecture 2016 Conscience in Equity: A New Utopia Professor Graham Virgo QC (Hon)*
In 1516 Sir Thomas More published Utopia, which identified an harmonious vision of law and society. As Lord Chancellor, More helped to develop Equity as a mechanism to secure justice, and so secure Utopia, as a counterweight to rigid judicial interpretation of the Common Law. From the start, this equitable jurisdiction was founded on conscience. Five hundred years later it is a jurisdiction which remains of profound practical importance in England and New Zealand. But, as the jurisdiction has developed, and although the language of conscience and unconscionability remain the touchstone for equitable intervention, judges and commentators have lost sight of what conscience and unconscionability actually mean. By tracing the historical development of conscience it is possible to identify the theoretical structure which justifies and explains the equitable jurisdiction and shows how it should develop in the future. Even though some commentators have predicted the death of Equity, by refocusing on the essence of conscience the equitable jurisdiction can be reinvigorated and lead us to a new legal Utopia.
In the analysis of conscience which follows I am conscious that I may be critical of New Zealand, but I am reminded by what Sir Thomas More wrote, which is particularly pertinent to me bearing in mind the great hospitality I received during my trip to New Zealand:1
You are not obliged to assault people with discourses that are out of their road, when you see that their received notions must prevent your making an impression upon them: you ought rather to cast about and to manage things with all the dexterity in your power, so that, if you are not able to make them go well, they may be as little ill as possible.
Unconscionability has been described as the ‘universal talisman’2 that underpins Equity. It is the golden thread that ties together the common laws of equitable obligations in many jurisdictions. It is a word that is often used by judges, legislatures and commentators, but it hides a myriad of meanings. The different uses of this single word in various jurisdictions means that, whilst there may appear to be a convergence of equitable principles and remedies in the common law, on closer inspection there is significant divergence; we are divided by a common equitable language. At the heart of the debate about the use and abuse of ‘unconscionability’ is confusion about whose conscience is relevant
FW Guest Memorial Lecture, delivered at the University of Otago, August 2016. I am grateful to the New Zealand Law Foundation for its support whilst I visited New Zealand as the Distinguished Visiting Fellow, 2016. Thomas More Utopia (tr Gilbert Burnet, London, 1808) at 56.
Anthony Mason “Themes and Prospects” in PD Finn (ed) Essays in Equity (Law Book Company, Sydney, 1985) 242 at 244.
to determine what is against conscience. Is it the conscience of the court or the conscience of the defendant determined either objectively or subjectively? Two decisions of the UK Supreme Court handed down one fortnight in May 2013 reveal very different interpretations of conscience.
Pitt v Holt3 concerned a claim in Equity to set aside a voluntary disposition by deed on the ground of a mistake relating to inheritance tax liability. Lord Walker held that the equitable jurisdiction to rescind a deed would be engaged if the mistake was sufficiently serious so that the assertion of the legal rights of donees under the deed would be unjust or unconscionable.4 This ‘unconscionableness’, as Lord Walker called it, is to be evaluated objectively,5 and requires close examination of the facts, including ‘the circumstances of the mistake and its consequences for the person who made the vitiated disposition’, change of position, and ‘other matters relevant to the exercise of the court’s discretion’.6 Lord Walker used the language of ‘unconscionableness’ interchangeably with that of ‘injustice’ and ‘unfairness’.7 This appears to involve the exercise of judicial discretion without regard to any obvious underlying principles. Lord Walker rejected the suggestion that this is ‘susceptible to judicial manipulation’ on the ground that the Court ought to form a judgment about the justice of the case.8
In that case the deed was rescinded even though the mistake related to the payment of tax which was lawfully due. A matter of particular significance was that the disposition did not form part of an artificial tax avoidance scheme and had in fact been authorised by the Court of Protection. Had the equitable jurisdiction been invoked in the consolidated appeal in Futter v Futter, which also involved a disposition to a trust, it is likely that the donee’s receipt would have been characterised as unconscionable, because the disposition did form part of an artificial tax avoidance scheme. Lord Walker described such schemes as ‘a social evil’,9 and emphasised that the Court might refuse to award equitable discretionary relief on the ground of public policy, suggesting that there are moral questions which need to be examined by the court in determining unconscionability.
Two weeks after Pitt v Holt the Supreme Court decided Vestergaard Frandsen A/S v Bestnet Europe Ltd,10 a case concerning accessorial liability for breach of the equitable duty of confidence. The claimant company had sued the defendant, a former employee, for breach of confidence, arising from the manufacture and sale of insecticidal mosquito nets
3 Pitt v Holt [2013] UKSC 26, [2013] 2 AC
108.
4 At [124].
5 At
[124]–[125].
6 At [126].
7 At
[126].
8 At [127]–[128].
9 At
[135].
10 Vestergaard Frandsen A/S v Bestnet Europe Ltd
[2013] UKSC 31, [2013] 1
WLR 1556.
which involved the use of the claimant’s trade secrets. The defendant had not breached any duty of confidence herself, but was associated with a consultant who had deliberately breached his own duty of confidence which was owed to the claimant. In considering the nature of the liability for breach of confidence, Lord Neuberger emphasised that the action ‘is based ultimately on conscience’.11 A defendant who learns of a trade secret in circumstances where she reasonably does not appreciate that it is confidential might be liable to respect the confidentiality from the moment she is told or otherwise appreciates that it is confidential, since from ‘that moment, it can be said that her conscience is affected in a way which should be recognised by equity’.12 Lord Neuberger interpreted conscience as encompassing knowledge, wilful blindness, reckless disregard of another’s rights and dishonesty, all of which he considered focus on the defendant’s own state of mind.13 But the defendant was not considered to be party to a common design to exploit trade secrets because she did not know that they were being misused.14
Whilst the different contexts of Pitt v Holt and Vestergaard might be sufficient to explain the distinct objective and subjective interpretations of conscience and unconscionability which were adopted, it is significant that this obvious difference of approach was not acknowledged, and this is symptomatic of the contemporary use of this ancient equitable language. As Kelvin Low has correctly recognised:15
Whereas every species of conduct that justifies equitable intervention may be described, perhaps not inaccurately, as ‘unconscionable’, they are themselves unconscionable in different ways. The flexibility of the word robs it of any stable meaning. To say that someone’s conduct is unconscionable does not tell us whether he is dishonest, untrustworthy or merely lacking in grace.
If unconscionability is to be interpreted in different ways, a taxonomy needs to be developed to explain when different interpretations are being used and why. An important part of that taxonomy will be the development of more accurate vocabulary to reflect the different meanings.
I The Language of Conscience and Unconscionability
A The Meaning of Conscience and Unconscionability
Gleeson CJ recognised that the use of the word ‘unconscionable’ ‘may be merely an emphatic method of expressing disapproval of someone’s behaviour, but its legal meaning is considerably more precise’.16 But
11 At [22].
12 At [25].
13 At
[26].
14 At [34].
15 Kelvin Low “Nonfeasance
in Equity” (2012) 128 LQR 63 at 67.
16 Australian
Competition and Consumer Commission v CG Berbatis Holdings
Pty Ltd [2003] HCA 18, (2003) 214 CLR 51 at [7].
identifying that precise legal meaning is not easy. The words ‘conscience’ and ‘unconscionability’ are typically used to justify a particular decision without further explanation and so might be criticised for vagueness. But are these words any different from other vague legal concepts, such as reasonableness, legitimate expectation or rule of law, around which much jurisprudence and commentary has developed? Indeed, in Elders Pastoral Ltd v Bank of New Zealand17 Somers J recognised that ‘words such as unconscionable and inequitable have drawn closer to more objective concepts such as fair, reasonable and just’. ‘Conscience’ might even be considered to be the equitable equivalent of ‘the rule of law’, which has been described as ‘vague and amorphous’ hence its appeal,18 since conscience provides a ‘hedge against tyranny and high-handed governance’19 by enabling Equity to regulate the exercise of power by fiduciaries. Nevertheless, it is noteworthy that much less attention has been paid to the philosophical foundations and principled interpretation of conscience, compared to the voluminous literature involving rigorous analysis of the rule of law.
In order for such theoretical and doctrinal work to be replicated in Equity, attention needs to be paid to the definition of conscience and unconscionability. Basic questions lack definitive answers, such as whether unconscionability is the antithesis of conscience. The preferable view is that it is, in the sense that unconscionability means ‘contrary to good conscience’.20 A further vital issue relates to the use of synonyms for unconscionability, to determine whether they might assist in determining what contrary to good conscience means. Common synonyms include bad faith, equitable fraud,21 injustice and unfairness.22 But other words and phrases have been used as well, including dishonesty and improper or commercially unacceptable conduct.23 In determining the taxonomy of conscience it will be vital to consider to what extent these words and phrases can be used to supplement or even replace the orthodox equitable language. But the fact that the words ‘conscience’ and ‘unconscionability’ are used by themselves or in conjunction with other words and phrases betrays a fundamental uncertainty as to what conscience is actually about. For example, is unconscionability a state of mind or does it relate to a normative standard for evaluating conduct, to morality or simply to a sense of guilt?
17 Elders Pastoral Ltd v Bank of New Zealand [1989] NZCA 406; [1989] 2 NZLR
180 (CA) at 193.
18 Allan C Hutchinson Is Eating People Wrong?
Great Legal Cases and How
they Shaped the World (Cambridge University Press, Cambridge, 2011) at
61.
19 At 61.
20 James McConvill and Mirko Bagaric “The Yoking of Unconscionability
and Unjust Enrichment in Australia” [2002] Deakin LR 225 at 249.
22 Pitt v Holt,
above n 3, at [126] per Lord Walker.
23 Yam Seng Pte Ltd v
International Trade Corporation Ltd [2013] EWHC 111
(QB), [2013] 1 Lloyd’s Rep 526 at [138] per Leggatt LJ.
B The History of Conscience
The history of conscience in Equity is complex and uncertain.24 Although what follows is a gross simplification of rigorous historical scholarship, it is possible to identify five different stages in the development of conscience as an equitable construct in broadly chronological order.
(i) The Chancellor’s Conscience
Conscience originally referred to the conscience of the Chancellor as the measure of justice, with conscience being a reference to the individual moral judgment of the judge,25 albeit one influenced by theological learning and canon law, since the Chancellor was typically a cleric.26 Conscience in this moral sense was criticised for its inherent uncertainty being, as Selden famously acknowledged, like making the Chancellor’s foot the measure of the standard foot.27
(ii) Personal Knowledge
As Chancery procedure developed, references to conscience involved the ascertainment of legally relevant facts from the judge’s personal knowledge or belief rather than by reference to what was alleged and proved.28
(iii) The Defendant’s Conscience
The focus then shifted to the assessment of the defendant’s conscience, as determined by the court, but with reference to what the defendant knew or believed to be true, rather than what he believed to be morally right. This interpretation of conscience derived from the ability of Equity to compel the defendant’s appearance and to examine the defendant on oath with a view to extracting a confession.29 It also reveals a focus of the Chancery court on intervening to purge or purify what was considered to be the corrupt conscience of the defendant, and has been described as a ‘cathartic jurisdiction’.30 This was recognised by Lord Ellesmere in Earl of Oxford’s Case:31
The Office of the Chancellor is to correct Men’s Conscience for Frauds, Breaches of Trust, Wrongs and Oppressions of what Nature soever they be ...
24 See Dennis R Klinck “The Unexamined ‘Conscience’ of Contemporary
Canadian Equity” (2001) 46 McGill LJ 571; and Rohan Havelock “The
Evolution of Equitable Conscience” (2014) 8 J Eq
128.
25 Christopher St German Doctor and Student (1523,
1531).
26 JH Baker An Introduction to English Legal History
(4th ed, Oxford University
Press, Oxford, 2002) at 99.
27 John Selden Table Talk of
John Selden (Selden Society, London, 1927) at 43.
28 Mike
Macnair “Equity and Conscience” (2007) 27 OJLS
659.
29 At 676.
30 Walter Ashburner and Denis Browne Ashburner’s Principles of Equity (2nd
ed, Butterworths, London, 1933) at 38–39.
31 Earl of
Oxford’s Case (1615) 1 Ch Rep 1 at 6–7, 21 ER 485 (Ch) at
486.
(iv) The Foundation of Equitable Doctrine
Under the influence of Lord Chancellors who were lawyers rather than clerics, equitable principles were identified and were often justified with reference to conscience. Through the development of a doctrine of precedent, categories of like cases were identified which were informed by past decisions and past values. So, rather than seeking to identify unconscionability in each case, it was sufficient that a case fell within a particular category of liability, the existence of which could be justified by reference to the old language of conscience.32 Here unconscionability operated as a matter of opinion, but one that had been ‘formed and informed by considered decisions in similar but not identical cases, by the values of the community, that is by the palimpsest of past legal and community traditions’.33
(iv) Rhetorical Conscience
The language of conscience and unconscionability has also been used simply as a rhetorical device behind which the judge could hide to exercise discretion without reference to principle.34 The wheel may appear to have gone full circle, with the modern judge, who seeks to interpret conscience in this way,35 appearing to act like the former Lord Chancellor and exercising judgment without reference to principle. But that is not the case. For the first interpretation of conscience was highly principled, with reference to theological interpretations of conscience. Modern approaches to conscience, which hide behind the language of conscience, do not reflect the original, principled notion of conscience.
(iv) Summary
This review of the history of conscience reveals a variety of different interpretations over time, although a general trend can be identified away from conscience as a test of morality, to conscience underpinning equitable principle. At times conscience has referred explicitly to the conscience of the defendant, but typically it has been interpreted objectively, albeit in the light of the defendant’s own knowledge and belief of the facts and circumstances.
II Contemporary Interpretations of Conscience
It does not necessarily follow that the historical understanding of conscience must determine the interpretation of conscience and unconscionability today. But reviewing contemporary equitable doctrines reveals four different interpretations of conscience, most of which are clearly influenced by the different stages in the historical development
32 CJ Rossiter and Margaret Stone “The Chancellor’s New Shoe” (1988) 11
UNSWLJ at 24.
33 At 26.
34 Dennis R Klinck
Conscience, Equity and the Court of Chancery in Early Modern
England (Ashgate, Farnham, 2010) at 10.
35 See Pitt v
Holt, above n 3, at [126] per Lord Walker.
of conscience: (1) The subjective conscience of the defendant with reference to his or her own knowledge and suspicions. Here conscience refers to a state of mind.36 (2) The objective conscience of the defendant with reference to what he or she should have known or suspected. (3) The court’s conscience, whereby the court determines on the facts of the case and with reference to recognised principles what the defendant ought to do as a matter of good conscience. Here conscience relates to an assessment of the defendant’s behaviour.37 (4) The judge’s conscience, whereby conscience is a rhetorical device behind which the judge can hide by asserting that a particular result is justified by good conscience but without needing to go further by explaining what that might mean. Each of these interpretations can be illustrated by a variety of different equitable doctrines.
A Subjective Conscience of the Defendant
The subjective interpretation of conscience refers to what the defendant knew or suspected. This interpretation is relevant to a variety of equitable contexts. For example, it underpins the creation of equitable interests. Where a defendant has received an asset in circumstances where the claimant has a restitutionary claim for its value, the defendant will hold the asset on constructive trust for the claimant if the defendant’s retention of it can be characterised as unconscionable.38 Here unconscionability is assessed with reference to the defendant’s knowledge or suspicion concerning the circumstances of the receipt.39 So, for example, if the claimant has paid money to the defendant in the mistaken belief that she was discharging a liability, that money will be held on constructive trust if the defendant knew that it had been paid by mistake. This is because, once the defendant was aware of the mistake, he should have repaid the money and the failure to do so constitutes the unconscionable conduct which justifies the recognition of the constructive trust.
The subjective interpretation of conscience has also been recognised to establish personal liability for unconscionable receipt of property transferred in breach of trust. It has been a matter of controversy as to what the appropriate level of fault to trigger such personal liability should be. This claim was originally called ‘knowing receipt’, and the language of ‘knowledge’ is still used.40 It has sometimes been held that an objective test of ‘constructive knowledge’ applies, so it is sufficient that the defendant failed to make such inquiries as a reasonable person would have made as to whether the asset had been transferred in breach
36 Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752
at [92] per Lord Walker.
37 At [92] per Lord
Walker.
38 Westdeutsche Landesbank Girozentrale v Islington LBC
[1996] UKHL 12; [1996] AC 669 (HL)
at 714 per Lord Browne-Wilkinson.
39 At 705 per Lord
Browne-Wilkinson.
40 Williams v Central Bank of Nigeria
[2014] UKSC 10, [2014] AC 1189 at [35]
per Lord Sumption.
of trust.41 Other cases have held that a subjective test applies, so it must be established that the defendant knew or suspected that the asset had been received in breach of trust.42 In Bank of Credit and Commerce International (Overseas) Ltd v Akindele43 it was held that the appropriate test is one of unconscionability,44 namely whether the defendant’s knowledge of the circumstances relating to the breach of trust made it unconscionable for him or her to retain the benefit of the property that had been received; constructive knowledge would not suffice. Although the Court of Appeal gave no real guidance as to what constitutes ‘unconscionable conduct’ for these purposes, it appears that a subjective test was contemplated.45 Clearly, a defendant’s receipt will be considered to be unconscionable if he or she knew of the breach of trust and, presumably, also if he or she turned a blind eye to the breach. It is not, however, clear whether the receipt of a defendant who was suspicious about the breach is unconscionable.
It cannot be stated with absolute certainty, however, that the law necessarily requires unconscionability for this receipt-based claim to be interpreted in a subjective sense. In Armstrong DLW Gmbh v Winnington Networks Ltd,46 for example, Stephen Morris QC held that unconscionability for these purposes encompassed both subjective awareness by the defendant of possible impropriety and also where, on the facts known to the defendant, a reasonable person would have appreciated that the transfer was in breach of trust or would have made such inquiries or sought advice which would have revealed the probability of breach of trust. In Arthur v Attorney-General of the Turks and Caicos Islands47 Sir Terence Etherton described knowing receipt as ‘involving unconscionable conduct amounting to equitable fraud. It is a classic example of lack of bona fides.’ But this confirms the ambiguity of unconscionability, since equitable fraud and absence of good faith can incorporate objective notions of fault.
The subjective interpretation of conscience has also been recognised as underpinning a claim for rectification for unilateral mistake. Where A mistakenly believes that the written contract to which she is a party contains a term, that contract may be rectified to accord with A’s belief where B, the other party to the contract, has acted unconscionably in some way. Unconscionability is interpreted subjectively as involving
41 Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER
393 (CA) at 405 per Buckley LJ and 412 per Goff LJ.
42 Re
Montagu’s Settlement Trust [1987] Ch 264
(Ch).
43 Bank of Credit and Commerce International (Overseas)
Ltd v Akindele [2001]
Ch 437 (CA).
44 At 455 per Nourse LJ.
45 See also
Criterion Properties plc v Stratford UK Properties LLC [2003] EWCA
Civ 1783[2002] EWHC 868; , [2003] 1 WLR 2108.
actual knowledge,48 but also includes wilful blindness, suspicion as to the mistake, as well as wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make.49 B must also have failed to draw the mistake to the notice of A and calculated that this would benefit him.50 In such circumstances it would be inequitable or unconscionable to allow B to resist rectification. Etherton LJ has described the defendant’s conduct in denying rectification as dishonest in a subjective sense.51
A further example of the subjective interpretation of conscience being reocgnsied relates to the efficacy of trustee exemption clauses. In Armitage v Nurse52 a clause in a trust instrument stated that no trustee should be liable for any loss suffered by the trust fund save where it was caused by the trustee’s ‘own actual fraud’. In determining the validity of this clause the Court equated fraud with dishonesty. A trustee would be considered to have acted dishonestly if he or she intended to pursue a course of action either knowing that it was contrary to the best interests of the beneficiaries or being recklessly indifferent to their interests, regardless of whether the trustee intended to benefit from the conduct.53 This is a subjective test of fault, with reference to the trustee’s intention, knowledge and recklessness, which means suspicion of adverse consequences arising from the trustee’s actions.54 It follows that, if the trustee knew or suspected that the breach of trust would, or might, have a detrimental effect on the beneficiaries, the liability for breach could not be excluded. There are, however, circumstances where dishonesty for these purposes is interpreted objectively, by reference to the standards of reasonable people. In Walker v Stones55 it was held that a trustee-solicitor could have acted dishonestly, even if he or she thought that he or she was acting in the best interests of the beneficiaries, if this belief was so unreasonable that no reasonable trustee acting in that profession could have held it. This stricter objective test of dishonesty was justified because of the higher standards expected of trustees who are solicitors.56
48 A Roberts and Co Ltd v Leicestershire County Council [1961] Ch 555 (Ch) at
570 per Pennycuick J; Riverlate Properties Ltd v Paul [1975] Ch 133 (CA) at 140; and Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyds Rep 353 (CA).
52 Armitage v Nurse
[1998] Ch 241 (CA) at 241.
53 At
251.
54 Barnes v Tomlinson [2006] EWHC 3115 (Ch), [2007]
WTLR 377; and Spread
Trustee Co Ltd v Hutcheson [2011] UKPC 13, [2012] 2 AC 194 at [60] per
Lord Clarke.
55 Walker v Stones [2001] QB 902
(CA).
56 See also Barnes v Tomlinson, above n 54, at [79]
per Kitchin J; and Fattal v
Walbrook Trustees (Jersey) Ltd [2010] EWHC 2767 (Ch) at [81] per Lewison J.
B Objective Conscience of the Defendant
The objective interpretation of conscience defines unconscionability with reference to what the defendant should have known or suspected. This has proved to be especially significant to establish personal accessorial liability for assisting a breach of trust or fiduciary duty. Such liability will only be imposed where the defendant is at fault in some way. Various tests of fault have been recognised, including knowledge of the breach, constructive notice,57 want of probity58 and dishonesty.59 The requirement of dishonesty has been confirmed by the House of Lords,60 but its meaning has proved controversial. In Twinsectra Ltd v Yardley61 dishonesty was defined by reference to whether the defendant considered that his or her conduct was dishonest by the standards of reasonable and honest people. This is a subjective test of dishonesty, which is also applied in the criminal law for property and economic offences such as theft and fraud.62 The House of Lords considered this to be the definition of dishonesty which had been adopted by the Privy Council in Royal Brunei Airlines v Tan,63 but an objective test of dishonesty was recognised in that case, namely whether the reasonable person would consider the defendant’s conduct to be dishonest, albeit that this was to be assessed in light of the facts as the defendant knew them to be. Lord Millett in Twinsectra recognised that the Privy Council in Tan had adopted an objective test of dishonesty, which he considered was focused on dishonest conduct rather than a dishonest state of mind, which is why a different test of dishonesty is used in the criminal law where the focus is on criminal culpability. Lord Millett analysed the approach of the Privy Council as involving:64
an objective standard of dishonesty by which the defendant is expected to attain the standard which would be observed by an honest person placed in similar circumstances. Account must be taken of subjective considerations such as the defendant’s experience and intelligence and his actual state of knowledge at the relevant time. But it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was.
In assessing this standard of honesty, the court will have regard to the defendant’s personal attributes and the reason why the defendant acted as he or she did. So, if the defendant is a professional, such as a solicitor, the objective standard of honesty will be more rigorous.
57 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (Ch)
at 1590 per Ungoed-Thomas J.
58 Carl Zeiss Stiftung v
Herbert Smith & Co (No 2) [1969] 2 Ch 276 (CA).
59 Re
Montagu’s Settlement Trusts, above n 42, at 286 per Sir Robert
Megarry
V-C.
60 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002]
2 AC 164.
61 Twinsectra Ltd v Yardley, above n
60.
62 See R v Ghosh [1982] EWCA Crim 2; [1982] QB 1053
(CA).
63 Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378
(PC).
64 Twinsectra Ltd v Yardley, above n 60, at
[121].
This objective test of dishonesty was subsequently confirmed by the Privy Council in Barlow Clowes International Ltd v Eurotrust International Ltd,65 was recognised by Arden LJ in Abou-Rahmah v Abacha66 and followed in Starglade Properties Ltd v Nash.67 In that case Morritt LJ recognised that:68
... there is a single standard of honesty objectively determined by the court. That standard is applied to specific conduct of a specific individual possessing the knowledge and qualities he actually enjoyed.
It is notable that the language of dishonesty rather than unconscionability is used to establish this claim. That is surprising, since the language of objective dishonesty could readily be replaced with that of unconscionability, especially in the light of the long tradition of conscience being interpreted objectively in Equity. In Williams v Central Bank of Nigeria69 Lord Sumption called this claim ‘knowing assistance’70 and considered it to be based on fraud, but he also added that the ‘liability of a knowing assister has always depended on the unconscionability of his conduct’.71 In the space of one paragraph the whole gamut of equitable fault is encompassed without any apparent awareness that these terms might bear different meanings.
The objective test of unconscionability has also been deployed to set aside a transaction where the claimant’s consent to enter into it was procured by unconscionable conduct.72 The equitable jurisdiction is engaged where the claimant suffered from a special disability or was in a disadvantageous position as against the defendant, so that there is a reasonable degree of inequality between the parties,73 and the defendant acted unconscionably in exploiting the claimant’s disadvantage. This has been described as involving equitable, or constructive, fraud.74 In Hart v O’Connor Lord Brightman recognised that equitable fraud involved the defendant acting in bad faith or taking advantage of the claimant in some way.75 The defendant needs to have acted in a morally reprehensible manner,76 either because he or she knew of the
65 Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC
37, [2006] 1 WLR 1476.
68 At [26].
69 Williams v Central
Bank of Nigeria, above n 40, at [35].
70 See also
Vestergaard Frandsen A/S v Bestnet Europe Ltd, above n 10, at [26]
per Lord Neuberger.
71 Williams v Central Bank of
Nigeria, above n 40, at [35]. (emphasis in
original).
72 Hart v O’Connor [1985] AC 1000 (PC);
and Crédit Lyonnais Bank Nederland
NV v Burch [1996] EWCA Civ 1292; [1997] 1 All ER 144 (CA) at 151 per Nourse
LJ.
73 Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at
405.
74 Earl of Chesterfield v Janssen, above n 21, at 157
per Lord Hardwicke; Hart
v O’Connor, above n 72, at 1028.
75 Hart v
O’Connor, above n 72, at 1028.
76 Boustany v Pigott
[1993] UKPC 17; (1995) 69 P & CR 298 (PC) at 303 per Lord Templeman.
claimant’s special disability or disadvantage or should have known of it, since the defendant was aware of particular facts which would have put the reasonable person on notice that the claimant had a special disability or disadvantage.77 So this encompasses an objective test. But fault of the defendant is not sufficient to characterise the transaction as unconscionable; it must also be oppressive in that there is a significant imbalance in the substance of the transaction to the disadvantage of the weaker party,78 such as where the transaction is at a gross undervalue. A transaction will not be oppressive simply because, ‘in the eyes of the court, it was unreasonable.’79
The action for breach of confidence is founded on the obligation of conscience80 and responds to wrongdoing in the form of unconscionable conduct. Megarry J recognised in Coco v Clark:81
The equitable jurisdiction in cases of breach of confidence is ancient; confidence is the cousin of trust. The Statute of Uses, 1535, is framed in terms of ‘use, confidence or trust’; and a couplet, attributed to Sir Thomas More, Lord Chancellor avers that;
‘Three things are to be helpt in Conscience; Fraud, Accident and things of Confidence’. (See 1 Rolle’s Abridgement 374).
Although Lord Neuberger in Vestergaard Frandsen A/S v Bestnet Europe Ltd82 assumed that the mental state to trigger liability for breach of confidence is subjective,83 this is inconsistent with a significant line of authorities, many of which he did not consider.84 Liability should in fact depend on whether the defendant was aware of the duty of confidence, or should have been aware of it because the reasonable person standing in the defendant’s shoes would have realised that the information was being given in confidence, so that the defendant had notice that the information was confidential.85
77 Nichols v Jessup [1986] NZCA 84; [1986] 1 NZLR 226 (CA) at 236 per
Somers J.
78 Strydom v Vendside Ltd [2009] EWHC 2130 (QB)
at [39] per Blair J.
79 Multiservice Bookbinding Ltd v Marden
[1979] Ch 84 (Ch) at 110 per Browne‑
Wilkinson J.
81 Coco v Clark [1968] FSR 415 (Ch) at
419.
82 Vestergaard Frandsen A/S v Bestnet Europe Ltd,
above n 10, at [25].
83 As recognised in some cases, eg, Thomas
v Pearce [2000] FSR 718 (CA)
(honesty); and R v Department of Health, ex parte Source Informatics Ltd [2001] QB 424 (CA) at [31] per Simon Brown LJ (‘[the defendant’s] own conscience, no more and no less’).
C Principled Conscience of the Court
Whereas subjective and objective interpretations of conscience assess unconscionability from the perspective of the defendant, principled conscience refers to the conscience of the court, in that the judge determines on the facts of the case and with reference to recognised principles whether the defendant ought, as a matter of good conscience, to be liable to the claimant. This is well illustrated by the institutional constructive trust. Equity might recognise that an asset is held on constructive trust to ensure that the defendant does not profit from what is characterised as unconscionable conduct in a principled sense. This was recognised by Millett LJ in Paragon Finance plc v DB Thakerar and Co: 86
A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property ... to assert his own beneficial interest in the property and deny the beneficial interest of 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.
So, for example, where the claimant has transferred an asset to the defendant in circumstances where the defendant was subject to a legally binding obligation to deal with the asset for the benefit of a particular person and the defendant breached that undertaking, he would hold the asset on constructive trust for that other person.87 This principled constructive trust has also been used to perfect an imperfect gift, where the donor sought to make a gift of property to the donee but failed to transfer legal title. The donor would hold the property on constructive trust for the donee if it would be unconscionable for the donor to revoke the gift, where, for example, the donor had represented to the donee that the gift would be made and the donee had relied on this representation in some way.88
The equitable doctrine of proprietary estoppel is triggered by unconscionable conduct,89 but this does not involve any assessment of the defendant’s mental state, whether assessed objectively or subjectively, as was recognised by Oliver J in Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd:90
... proprietary estoppel ... is directed rather at ascertaining whether, in
86 Paragon Finance plc v DB Thakerar and Co [1998] EWCA Civ 1249; [1999] 1 All ER 400 (CA) at 409.
See also Westdeutsche Landesbank Girozentrale v Islington London Borough Council, above n 38, at 705 per Lord Browne-Wilkinson.
88 Pennington v Waine [2002] EWCA Civ
227, [2002] 1 WLR 2075.
89 Blue Haven Enterprises Ltd v Tully
[2006] UKPC 17 at [24] per Lord Scott.
90 Taylor Fashions
Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 (Ch)
at 151–152.
particular individual circumstances, it would be unconscionable for a party to be permitted to deny that which knowingly, or unknowingly, he has allowed or encouraged another to assume to his detriment than to inquiring whether the circumstances can be fitted within the confines of some preconceived formula serving as a universal yardstick for every form of unconscionable behaviour.
Whilst this may appear to involve the determination of unconscionability on the facts through the exercise of unprincipled judicial discretion, the operation of unconscionability is founded on principles, as recognised by Lord Scott in Yeoman’s Row Management Ltd v Cobbe:91
... unconscionability of conduct may well lead to a remedy but, in my opinion, proprietary estoppel cannot be the route to it unless the ingredients for a proprietary estoppel are present ... To treat a ‘proprietary estoppel equity’ as requiring neither a proprietary claim by the claimant nor an estoppel against the defendant but simply unconscionable behaviour is, in my respectful opinion, a recipe for confusion. ... Proprietary estoppel requires ... clarity as to what it is that the object of the estoppel is to be estopped from denying, or asserting, and clarity as to the interest in the property in question that that denial, or assertion, would otherwise defeat. If these requirements are not recognised, proprietary estoppel will lose contact with its roots and risk becoming unprincipled and therefore unpredictable, if it has not already become so.
In Yeoman’s Row itself, even though the defendant’s conduct was characterised as unconscionable in withdrawing from an oral agreement to sell property immediately after planning permission had been obtained, no equitable remedy was awarded to satisfy the claimant’s expectations. Crucially, Lord Walker emphasised that careful analysis should not be abandoned in favour of ‘unprincipled and subjective judicial opinion’.92 Particularly pertinent to the recognition of the principled conscience of the court, Lord Walker emphasised that conscience was being used in this context as an ‘objective value judgment on behaviour (regardless of the state of mind of the individual in question)’.93
D Discretionary Conscience of the Judge
The final interpretation of conscience is to treat it simply as a rhetorical device behind which the judge can hide, by asserting that a particular result is justified by good conscience but without needing to go further by explaining what that might mean. This is an approach to Equity which can be traced back to Sir Thomas More’s Utopia:94
The law and Judges should avoid arcane interpretations and debates about law but should instead judge the overall equity or justice of a situation and decide accordingly.
91 Yeoman’s Row Management Ltd v Cobbe, above n 36,
at [17] and [28].
92 At [59].
93 At
[92].
94 Thomas More Utopia (1516) Book 1 at 45.
It is an approach that enables the judge to reach a judgment about what he or she considers to be a just result on the facts, but without explicit reference to recognised principles, it being sufficient to hide behind the smokescreen of what might be considered to be ancient language which incorporates its own principles, but without identifying what those principles might be. Rather, discretionary conscience permits a holistic analysis of the facts, by enabling the court ‘to look at the matter in the round’.95
It is this discretionary interpretation of conscience which underlies the so-called ‘new constructive trust’ which was developed in the 1970s by a number of judges, led by Lord Denning MR, who used the constructive trust as a mechanism to create equitable property rights where justice and good conscience demanded it.96 But this was subsequently rejected because it is unprincipled and uncertain.97 Similarly, the notion of ‘public conscience’ was used in the 1980s in England to temper the perceived rigidity of the ex turpi causa rule, by virtue of which claims would be defeated if the claimant was tainted by illegality. This rule was reformulated so that the illegality defence applied only where the public conscience would be affronted if relief was granted. This test was recognised in Equity,98 but was rejected by the House of Lords on the grounds that it was inconsistent with the authorities and too uncertain.99 The courts were surely right to do so. The public conscience test was vague and resulted in inconsistent decisions,100 often turning on judicial outrage arising from the facts of the case.101 Justice is dependent on a high degree of predictability, which is lacking under the public conscience test.102
Experimentation with discretionary judicial conscience in the late twentieth century appears to have been short-lived, both as regards the new model constructive trust and the public conscience test. But the decision of the Supreme Court in Pitt v Holt103 resurrects this approach, since ‘unconscionableness’ lacks any reference to underlying principle and essentially permits the judge to reach the result which he or she considers to be just and fair. Indeed, Lord Walker specifically recognised
95 Gillett v Holt [2001] Ch 210 (CA) at 225 per Walker LJ, cited in Pitt v Holt,
above n 3, at [126] per Lord Walker.
97 Burns v Burns [1984] Ch 317 (CA) at 342
per May LJ.
98 Tinsley v Milligan [1992] Ch 310
(CA).
99 Tinsley v Milligan [1993] UKHL 3; [1994] 1 AC 340 (HL).
100 At
363 per Lord Goff.
101 Hewison v Meridian Shipping Services Pte Ltd
[2002] EWCA Civ 1821, [2003]
ICR 766 at 788 per Ward LJ.
103 Pitt v Holt, above n 3.
that, when determining whether the donor’s mistake is sufficiently grave to vitiate the disposition, close examination of the facts is required with reference to all the circumstances and consequences of the mistake.104 Conscience interpreted in its purely discretionary sense consequently continues to operate.
III A New Taxonomy of Conscience
This survey of the use of conscience and unconscionability reveals disparate interpretations of apparently similar concepts. What is particularly concerning is the apparent assumption amongst many judges and commentators that conscience has a consistent meaning. That is clearly not the case. In order to ensure precision of analysis, consistency of application and appropriate communication of meaning a new taxonomy of conscience needs to be adopted, involving a fundamental distinction between the defendant’s conscience and the conscience of the court.
A The Defendant’s Conscience
When assessing the defendant’s conscience it is necessary to distinguish between conscience as a state of the defendant’s mind and as an assessment of the defendant’s behaviour, which essentially reflects subjective and objective interpretations of conscience.
Conscience is sometimes assessed with reference to the defendant’s own state of mind, having regard to what the defendant intended, knew or suspected. But subjective conscience is increasingly rare as a test of fault, with evidence that it is being displaced in favour of the objective interpretation. Even subjective interpretations of conscience have objective undertones, since determining the defendant’s state of mind inevitably involves considerations of what a reasonable person would have thought in the circumstances of the case.
The preferable interpretation of the defendant’s conscience is that it refers to an assessment of the defendant’s conduct, albeit in light of the facts as the defendant knew, believed or suspected them to be. Conscience is to be assessed not by reference to the defendant’s own assessment of his or her conduct but to an external, objective assessment. This is consistent with the historical development of conscience in Equity, in that the court determines what the defendant’s conscience should require him or her to do in the light of his or her own awareness of the facts.
In order to distinguish between different interpretations of unconscionability, this objective assessment of the defendant’s behaviour should be called ‘dishonesty’. This is a word, however, which is not free from difficulty. Indeed, the objective definition of dishonesty in the action for dishonest assistance provides no definition of what dishonesty itself is. Sometimes the language of honesty has been qualified. For example, in George Wimpey UK Ltd v VI Construction Ltd105 Sedley LJ preferred to
use the language of ‘honourable’ rather than ‘honest’, but he also wanted to incorporate the language of reasonableness. As he said:106
The phrase ‘honest and reasonable’ is not a term of art. It is a judicial attempt to sketch a line beyond which conduct may be regarded as unconscionable or inequitable. Its duality, however, is a recognition that honesty alone is too pure a standard for business dealings because it omits legitimate self-interest; while reasonableness alone is capable of legitimising Machiavellian tactics.
This dual standard of honesty and reasonableness might usefully identify the core sense of the objective interpretation of the defendant’s fault. Where, in the light of the defendant’s awareness of the facts, his or her action or failure to act can be considered to be dishonest and unreasonable, it follows that the defendant’s conduct is properly characterised as unconscionable. It is appropriate simply to call this ‘dishonest’. Dishonesty in this objective sense should constitute the essence of equitable fault. It does not follow that unconscionability as a subjective state of mind has no role to play in contemporary Equity, although, as will be seen, its role is much less significant than previously thought.
B The Court’s Conscience
The conscience of the court can be interpreted as the exercise of judicial discretion. But such discretion is notoriously characterised as involving uncertainty and unpredictability and has often been rejected for this reason. For example, in Doe v Kersey in 1795 Lord Camden said:107
The discretion of a Judge is the law of tyrants; it is always unknown; it is different in different men; it is casual, and depends upon constitution, in temper and passion. In the best it is oftentimes [sic] caprice; in the worst it is every vice, folly and passion to which human nature is liable.
In fact the dichotomy between uncontrolled discretion and principled discretion is false. HLA Hart108 recognised that discretion is fundamentally different from arbitrary choice: discretion is ‘a certain kind of wisdom or deliberation guiding choice’,109 so that a decision which is not susceptible to principled justification is not an exercise of discretion at all. Hart rejected arbitrary choice as a basis for judicial decision-making. He was right to do so. Whilst the role of judicial discretion involves a choice and is essential to ensure that justice is achieved, if the resort to justice is to be defensible and predictable, there needs to be identifiable principles or recognised factors to guide that discretion and to ensure that like cases are treated alike, for the benefit of the parties, their advisers and, if the case goes to trial, the judge.
106 At [60].
107 Cited in Edward Wynne Eunomus or, Dialogues Concerning
the Law and
Constitution of England: with an Essay on Dialogue (5th ed, London,
1822) at 91.
108 HLA Hart “Discretion” (2013) 127 Harvard L Rev
652.
109 At 658.
These principles have emerged over time through the constant evolution of Equity. Such principles are typically founded on what the judge considers to be just and fair, not determined through the exercise of arbitrary choice but rather as an external normative standard against which the defendant can be judged. Some of these equitable principles can be identified at a high-level of abstraction, such as fair dealing, trust and confidence, but then various sub-branches can be identified from them,110 often influenced by the particular context. So, for example, Toulson LJ has said of the equitable remedy of rectification that:111
... its origins lie in conscience and fair dealing, but those origins cannot be invoked to justify an unprincipled approach: far from it. Particularly as rectification is normally invoked in a contractual context, it seems to me that its principles should reflect the approach of the law to contracts, in particular to the formation and interpretation of contracts. Similarly, as rectification most commonly arises in a commercial context, it is plainly right that the applicable principles should be as clear and predictable in their application as possible.
Gleeson CJ summarised eloquently the proper approach to this notion of principled conscience, namely that the relevant conscience is one ‘properly formed and instructed’ with respect to the conduct in question.112
It follows that the taxonomy of conscience and unconscionability is threefold:
(1) The defendant’s subjective state of mind.
(1) The defendant’s behaviour assessed with reference to the defendant’s awareness of the circumstances.
(1) The conscience of the court exercised with reference to recognised principles at various levels of abstraction.
IV Implications
Whether this taxonomy is sufficiently robust to explain the state of the law and, if it is found wanting, to justify reform, requires careful consideration of disparate aspects of contemporary Equity. Suffice for now to consider two potential implications: the role of fault in equitable claims and the exercise of remedial discretion.
A The Determination of Fault in Equitable Claims
When
assessing the appropriate level of fault in equitable claims,
110 Shearer v Spring Capital Ltd [2013] EWHC 3148 (Ch) at [250] per Daniel
Alexander QC.
reference is sometimes made to the Baden classification.113 Although this has been subject to much criticism from judges114 and commentators, it remains of some use, if only as a way of identifying the range of fault recognised in Equity. Traditionally, equitable receipt-based and accessorial liability claims have required proof of knowledge, which is what the Baden classification refers to. In that case, five different types of knowledge were identified:
(1) actual knowledge;
(1) wilfully shutting one’s eyes to the obvious;
(2) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would have made;
(2) knowledge of circumstances that would indicate the facts to an honest and reasonable person; and
(2) knowledge of circumstances that would put an honest and reasonable person on inquiry.
This classification must be treated with caution, particularly because the distinctions between the categories are difficult to draw in practice and may be too refined.115
The Baden language of knowledge once formed the defining fault component of both receipt-based and accessorial personal liability claims. That language has been replaced by unconscionability and dishonesty respectively. In reality, however, the line between the two fault elements is difficult to draw. In Dubai Aluminium Co Ltd v Salaam116 Lord Millett described the claim for knowing receipt as founded on allegations of dishonesty and then described it as dishonest receipt, and most recently Lord Neuberger emphasised three times in the space of one paragraph that the liability of the recipient is founded on dishonesty.117 This is consistent with the analysis of the defendant’s conscience as involving conduct objectively assessed in the light of the defendant’s own knowledge or suspicion of the facts. In a receipt-based claim the defendant’s behaviour is unconscionable (or dishonest) when he or she should have restored the value of the property received in the light of the facts involving breach of trust which the defendant knew or suspected. The defendant will be liable for assisting or inducing a breach of trust when his or her conduct is characterised as dishonest (or unconscionable)
113 Baden v Société Générale pour Favoriser le Développement du Commerce et de
l’Industrie en France SA [1993] 1 WLR 509 (Ch) at [250] per Peter Gibson J.
115 Agip (Africa) Ltd v
Jackson [1990] Ch 265 (Ch) at 293 per Millett J.
116 Dubai Aluminium
Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366.
117 Williams v
Central Bank of Nigeria, above n 40, at [64]. See also
Vestergaard
Frandsen A/S v Bestnet Europe Ltd, above n 10, at [42] per Lord Neuberger.
in the light of the facts involving the breach which the defendant knew or suspected.
It follows that unconscionability in its objective sense should be the appropriate fault for both equitable receipt-based and accessorial liability claims. In fact, this can be considered to embody all aspects of the Baden test, since, in the light of the defendant’s knowledge (which should encompass belief and suspicion) the question is whether the defendant’s behaviour was appropriate, which will be assessed objectively with reference to what the reasonable person would have done.
Remedial Discretion
Conscience may also assist in the exercise of the court’s discretion when determining the appropriate remedy to be awarded, either with reference to the defendant’s fault or the principled conscience of the court. This can be illustrated by three contexts where judges have a discretion to determine the appropriate remedy to be awarded.
C Breach of Confidence
In the action for breach of confidence two personal remedies are available, depending on the state of the defendant’s conscience as a standard of fault. One is account of profits and the other is the negotiation measure, which is assessed with reference to what the claimant could reasonably have demanded from the defendant to waive the obligation of confidence. Account of profits is typically available where subjective unconscionability can be established, in that the defendant deliberately or recklessly breached a duty of confidence.118 Where the defendant unconsciously breached the duty of confidence the negotiation measure will be awarded.119 The award of these remedies can be justified with reference to unconscionability. Where the subjective test of unconscionability is engaged the more extensive remedy of account of profits can be justified, whereas the negotiation measure is justified where the defendant’s breach of duty can be characterised as objectively unconscionable.
D Proprietary Estoppel
The remedial consequences of proprietary estoppel involve the exercise of discretion by reference to the court’s conscience, but in a principled way. It was recognised by the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher120 that ‘the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct’. Whilst superficially vague, this does provide a basis from which principles have been identified. So, for example, the relief usually reflects the value of
118 Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1964] 1 WLR
96 (Ch).
119 Seager v Copydex [1967] 1 WLR 923 (CA) at 931 per Lord
Denning MR, 935
per Salmon LJ, and 939 per Winn LJ. See also Vestergaard Frandsen A/S v
Bestnet Europe Ltd, above n 10, at [24] per Lord
Neuberger.
120 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR
387 at 419.
what the promisor has promised,121 although this may not always be the just measure of relief.122
E Remedial Constructive Trust
Unconscionability should be relevant to the award of proprietary remedies as well. Whilst the remedial constructive trust is not recognised in England,123 a compelling case can be made for its recognition, but only if the court’s discretion is exercised with reference to the principled notion of unconscionability. One of the significant objections to the recognition of the remedial constructive trust is that it would involve unrestrained judicial discretion. Birks was strongly opposed to its recognition for that reason. He said:124
The law of remedies is not exempt from the demands of certainty and predictability: nor is the law as a whole intellectually respectable if, even at the level of remedies, it takes refuge in an inscrutable case to case empiricism. ... Practising lawyers need to be able to advise their clients as to the likely results of litigation. The judges on whom those results depend need the insulation from personal criticism which only objectively ascertainable rules and principles can provide.
Whilst it is undoubtedly the case that unrestricted discretion is unacceptable, in part for the reasons identified by Birks, as Hart argued this does not involve the exercise of discretion at all, but arbitrary choice; discretion demands principles to guide and justify the judicial decision. There is no reason why such principles cannot be identified for the remedial constructive trust,125 such that the judge should be able to decide that assets or profits are held on constructive trust where that is consistent with recognised principles. This would also enable the judge to fashion the constructive trust appropriately. As Deane J recognised in Muschinski v Dodds:126
The fact that the constructive trust remains predominantly
remedial
does not, however, mean that it represents a medium for the
indulgence
121 Sidhu v Van Dyke [2014] HCA 19, (2014) 251 CLR 505 at [85] per French
CJ, Kiefel, Bell, and Keane JJ.
122 At [83].
123 FHR European
Ventures Ltd v Cedar Capital Partners LLC [2014] UKSC 45,
[2014] UKSC 45; [2015] AC 250 at [47] per Lord Neuberger. See also Lord Neuberger “The Remedial Constructive Trust—Fact or Fiction” (speech to the Banking Services and Finance Law Association Conference, Queenstown, 10 August 2014) available at: <www.supremecourt.uk/docs/speech-140810. pdf>.
of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundations of such principles ... proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion, subjective views about which party ‘ought to win’ ... and ‘the formless void’ of individual moral opinion.
The key question, then, will be what principles should be relevant when determining whether a remedial constructive trust should be recognised. In fact, the preferable analysis of the constructive trust is that, rather than there being two diametrically opposed camps of institutional and remedial constructive trust,127 the trust should be regarded essentially as institutional, arising by operation of law, but it should be possible to modify the proprietary implications of recognising the trust with regard to principles grounded on the state of the recipient’s conscience.
The most important principle underpinning the constructive trust is that it should be triggered with regard to the court’s characterisation of the defendant’s conduct. Dishonesty is an objective standard of unconscionability, albeit one which is assessed with references to the defendant’s knowledge or suspicion about the relevant facts. That standard is appropriate to justify the imposition of a personal liability. But something more should be needed for the recognition of proprietary rights in Equity and that is why subjective unconscionability, involving deliberate or reckless conduct, should be the standard for the recognition of the constructive trust. This will not be an absolute standard, however, since there will be circumstances where an objective test of unconscionability can be justified, especially where a fiduciary is liable for breach of duty, because of the high standard of conduct expected of fiduciaries. That would be consistent with what Hayton has called the ‘good person’ philosophy, namely that fiduciaries are expected to act as good people for the benefit of their principals.128 For that reason we can justifiably deem a fiduciary to have acted unconscionably where they have acted in breach of fiduciary duty, which should be sufficient to recognise a constructive trust.
Why should the defendant’s fault be relevant to create a proprietary interest? This can be justified because an unconscionable defendant should be deprived of all benefits arising from their unconscionable conduct; the claimant’s claim to the assets is stronger than that of the defendant; the defendant should be purged of his or her unconscionability by disgorging all benefits obtained from the unconscionable conduct; and all those claiming through the defendant should likewise have their conscience purged from all possible unconscionability. Of course, these
127 See Deane J in Muschinski v Dodds, above n 126, at 614: ‘... for the student
of equity, there can be no true dichotomy between the two notions’.
justifications become ever more absurd and unconvincing, but that is why the constructive trust should not be absolute but can be modified.129 There may be other considerations to take into account, such as whether other remedies can do the same work more effectively or third party recipients have pure consciences which do not need to be purged.
The appropriate model of the constructive trust consequently is one where the trust arises by operation of law where the defendant’s receipt or retention of property is unconscionable, actual or deemed, but this trust can be modified with reference to recognised principles, such that the proprietary implications of the trust might be amended. The operation of this model of the constructive trust can be tested by reference to a particularly controversial problem, namely whether a fiduciary who has received a bribe from a third party should hold that bribe on constructive trust for the principal. In England the Supreme Court has held that the fiduciary will hold the bribe on an institutional constructive trust for the principal.130 This is justified because the fiduciary should be treated as though he or she had acquired the bribe on behalf of the principal, who therefore has a proprietary interest in it. This result can be justified with reference to unconscionability,131 which is deemed because of the high standards we expect of fiduciaries, such that the fiduciary should not profit from the breach of duty, so any increase in the value of the bribe should be transferred to the principal. But what about those who claim through the fiduciary? In particular, where the asset which has been held on constructive trust has been transferred to a volunteer recipient whose conscience is not tainted, why should the principal be able to vindicate his or her proprietary right against the recipient? Here it would be appropriate to modify the constructive trust so that the equitable proprietary right is defeated by the innocent receipt. It would be different, however, if the recipient’s conscience was tainted by knowledge or suspicion about the bribe,132 for then the principal’s proprietary right should be vindicated in equity.
V Conclusions
To understand the true function of conscience and unconscionability in Equity it is vital to distinguish between the conscience of the defendant and the conscience of the court. The former involves an assessment of fault, interpreted subjectively or objectively. When fault forms a necessary part of the equitable claim, usually the defendant’s conscience is to be assessed objectively, in the light of what the defendant knew or suspected,
129 See Graham Virgo “The Genetically Modified Constructive Trust” (2016)
2 CJCCL 579.
130 FHR European Ventures Ltd v Cedar Capital Partners
LLC, above n 123.
131 Tanwar Enterprises Pty Ltd v Cauchi [2003]
HCA 57, (2003) 217 CLR 315 at
[20].
and this can legitimately be described as dishonesty. The subjective assessment of the defendant’s conscience should be exceptional and preferably is only relevant to the recognition, and potential modification, of equitable proprietary rights. In Vestergaard Frandsen A/S v Bestnet Europe Ltd133 the reference to conscience for purposes of establishing the claim for breach of confidence was a reference to the defendant’s fault. Since this did not involve any proprietary implications, the objective interpretation of conscience should have been adopted, in accordance with the general trend of the authorities, and not the subjective interpretation as adopted by Lord Neuberger.
Alternatively conscience refers to the conscience of the court, which enables the judge to determine the justice of the case but only in a principled way and not by reference to an arbitrary choice. It is this sense of conscience which was adopted by Lord Walker in Pitt v Holt,134 but since he did not identify any principles to underpin the exercise of the discretion, this reference to conscience was inappropriate. In fact, any reference to conscience and unconscionability in the context of equitable rescission for mistake was unnecessary, it being sufficient that the mistake was sufficiently serious before a disposition could be rescinded. If it is considered to be desirable to retain the language of conscience to explain the operation of the equitable jurisdiction, this needs to be explicitly linked to the seriousness of the mistake as the underlying principle which enables the court to conclude that the defendant’s receipt of a mistaken payment can be characterised as unconscionable. In other words, unconscionability is the conclusion rather than the test to trigger equitable intervention.
Any suggestion that the use of the language of conscience is only relevant to enable the judge to secure the perceived just result on the facts of the case should be rejected. Ultimately, and fundamentally, the true role of conscience in contemporary Equity reflects a battle over the nature of private law. There is a spectrum of approaches. At one end, characterised by Birks’s position, is the pure logic of the law, founded on reason, principle and predictability where there is no role for conscience. At the other end, reflected in the approach of many judges, is the desire to reach the just result on the facts behind the smokescreen of conscience. The preferable approach falls somewhere between the two extremes. Principled justice is justifiable; principled conscience has a legitimate role to play in explaining the equitable jurisdiction. That way conscience is not higher than the law, but is an essential part of it and contributes to an equitable Utopia.
133 Vestergaard Frandsen A/S v Bestnet Europe Ltd, above n
10.
134 Pitt v Holt, above n 3.
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