Cur. adv. vult.
JUDGMENT
The plaintiffs are a Dutch company making, amongst other things, aluminium foil. The defendants are an English company in respect of which its bankers, Hume Corporation Ltd., on November 1, 1974, appointed a receiver pursuant to powers granted by the defendants under a debenture dated January 10, 1974. On October 30, 1974, just before the appointment of the receiver, a writ had been issued in this action by the plaintiffs, and an interlocutory injunction was obtained on October 30 from Cusack J. in relation to goods supplied by the plaintiffs to the defendants and still in the possession of the defendants.
There is no doubt that on November 1, 1974, the defendants owed the plaintiffs Hfl. 757,886, or £122,239.74 at the rate of exchange of Hfl. 6.20 [Dutch Florins] to the pound, in respect of a large number of invoices in relation to sales of aluminium foil to the defendants from August 1, 1974. After his appointment, the receiver certified that £35,152.66 was held in an account in his name as receiver-manager of the defendants with the Hume Corporation, and that amount represented the proceeds of sale of aluminium foil supplied by the plaintiffs to the defendants and then sold by the latter to third parties. In this action the plaintiffs now seek to establish by declaration their right to a charge on this sum, basing their claim on a right to trace on the principle established in In re Hallett's Estate (1880) 13 Ch.D. 696.
Secondly, the receiver has certified that aluminium foil to a value alleged to be £50,235 is held by him, having originated in deliveries to the defendants by the plaintiffs. The plaintiffs seek a second relief, namely, a declaration that this quantity of foil is theirs, and an order for its delivery up. Very much as a third string to their claim and only if they should fail on their first and second claims to relief, the plaintiffs sought judgment for the price.
The first major issue in this case turns on whether clause 13, in what the plaintiffs say are their general selling terms and conditions for aluminium foil, applied to the transactions done between the plaintiffs and the defendants, in respect of which £122,239 is owing. That clause began with this important reservation of title. The first sentence of the clause reads as follows:
"The ownership of the material to be delivered by A.I.V." (that is the plaintiffs) "will only be transferred to purchaser when he has met all that is owing to A.I.V., no matter on what grounds."
I read the remainder of the clause in view of its somewhat elaborate nature and of subsequent issues arising:
"Until the date of payment, purchaser, if A.I.V. so desires, is required to store this material in such a way that it is clearly the property of A.T.V. A.I.V. and purchaser agree that, if purchaser should make (a) new object(s) from the material, mix this material with (an)other object(s) or if this material in any way whatsoever becomes a constituent of (an)other object(s) A.I.V. will be given the ownership of this (these) new objects(s) as surety of the full payment of what purchaser owes A.I.V. To this end A.I.V. and purchaser now agree that the ownership of the article(s) in question, whether finished or not, are to be transferred to A.I.V. and that this transfer of ownership will be considered to have taken place through and at the moment of the single operation or event by which the material is converted into (a) new object(s), or is mixed with or becomes a constituent of (an)other object(s). Until the moment of full payment of what purchaser owes A.I.V. purchaser shall keep the object(s) in question for A.I.V. in his capacity of fiduciary owner and, if required, shall store this (these) object(s) in such a way that it (they) can be recognized as such. Nevertheless, purchaser will be entitled to sell these objects to a third party within the framework of the normal carrying on of his business and to deliver them on condition that - if A.I.V. so requires - purchaser, as long as he has not fully discharged his debt to A.I.V. shall hand over to A.I.V. the claims he has against his buyer emanating from this transaction."
If the plaintiffs can establish that clause 13 does apply, as between themselves and the defendants, they are admittedly entitled to succeed on their second claim, the goods in question in the possession of the defendants still being their property. But their first claim, namely, the right to trace, is disputed. I must therefore deal first with the hotly contested point whether clause 13 did apply between the plaintiffs and the defendants. The plaintiffs say it did, expressly, or impliedly. The defendants say that it did apply admittedly to trade that had beer? carried on between the plaintiffs and a firm called Romalpa Aluminium, prior to the plaintiffs beginning to do business with the defendants on September 1, 1973. They deny, however, that the clause applied to business done between the plaintiffs and the defendants from that date onwards.
[His Lordship narrated the course of dealing between the plaintiffs and the partnership and referred to the agreement by the two partners, Mr. Rodbard and Mr. Malyon, that the plaintiffs' general selling terms and conditions, which had been deposited in all the district courts of the Netherlands, should apply to all transactions between the plaintiffs and the partnership, including the ownership clause, clause 13. He said that after the defendants acquired the business of the partnership in September 1973 and the two partners became directors, orders were placed as before, and confirmations and acknowledgments were given to the defendants as before and on exactly the same printed forms as had been in use between the plaintiffs and the partnership since 1971. In his Lordship's judgment it followed from the facts that the full deposited terms, including clause 13, did apply to every order placed by the defendants with the plaintiffs; that there was an express incorporation of clause 13 in the various contracts made between the parties. If there were any doubt about that, the full terms, including clause 13, were impliedly agreed to apply to each order. His Lordship continued:]
Having decided that clause 13 did apply to the many transactions between the plaintiffs and defendants after September 1, 1973, when the defendants took over the aluminium foil business that the partnership had previously conducted with the plaintiffs, I now have to deal with the consequences of that decision as applying to the claims in the action.
In the first place, it is admitted that the plaintiffs are the owners of the remaining unsold aluminium foil held by the receiver, and that they are entitled to an order for its delivery up to them. The real contest arose in relation to the plaintiffs' right to a charge on the receiver's account with the Hume Corporation to the extent of £35,152.66 representing, as certified by the receiver, the sum recovered by him from customers of the defendants as a result of A.I.V. materials supplied to the defendants by the plaintiffs. This right the plaintiffs claim on the basis of the principle established in In re Hallett's Estate, 13 Ch.D. 696 entitling them to trace the proceeds of the sale of their property sold by the plaintiffs into the receiver's bank account. It is common ground that the effect of clause 13 is that, while money was owing by the defendants to the plaintiffs, any aluminium foil delivered by the plaintiffs to the defendants, while still in their possession, was held by them as bailees.
It is further common ground that the clause must be read subject to the necessary implication that the defendants were entitled to sell the foil to sub-purchasers. It is curious that this is not said about sales of unmixed foil whilst it is said in the last sentence of the clause about foil mixed with other material. In respect of this, it is to be noted that the defendants were, if required, to assign to the plaintiffs their rights against sub-purchasers in respect of the mixed materials sold to them. Notwithstanding the generally far-reaching and somewhat elaborate provisions in clause 13, reserving the plaintiff's right of ownership in the goods until nothing was owing from the purchasers, and the admission that the clause had the effect of making the defendants bailees of the goods while in their possession until all money owing had been paid, the argument for the defendants was that once foil had been sold to bona fide purchasers, the relationship between the plaintiffs and the defendants was purely one of debtor and creditor. As against this, the plaintiffs argued that a fiduciary relationship stemming from the bailment continued after sales to third parties, and that in consequence equitable remedies applied, including the right to trace proceeds of the sub-sales. It was not necessary, said the plaintiffs, to find as a prerequisite to the right to trace an express or constructive trust. The equitable proprietary remedy followed as a consequence of the finding that the defendants were bailees.
Having indicated the general nature of the competing arguments, I can go straight to the judgment of Sir George Jessel M.R. in In re Hallett's Estate, 13 Ch.D. 696. Although in that case there had been breaches of express trust, it is clear from the passages I am about to read that the reasoning was not founded on this, and that the principle stated applied to much wider circumstances. It is necessary to make certain fairly extensive quotations. Sir George Jessel M.R. said, at p. 708:
"The modern doctrine of equity as regards property disposed of by persons in a fiduciary position is a very clear and well-established doctrine. You can, if the sale was rightful, take the proceeds of the sale, if you can identify them. If the sale was wrongful, you can still take the proceeds of the sale, in a sense adopting the sale for the purpose of taking the proceeds, if you can identify them. There is no distinction, therefore, between a rightful and a wrongful disposition of the property, so far as regards the right of the beneficial owner to follow the proceeds. ..."
Pausing there for a moment, it is not, of course, suggested here that there was a wrongful disposition of the plaintiff's property when the defendants sold the foil to bona fide sub-purchasers. The latter would get a good title pursuant to section 25 of the Sale of Goods Act 1893. As between the plaintiffs and defendants, however, property had never passed to the defendants. I continue with the quotation, at p. 709:
"But it very often happens that you cannot identify the proceeds. The proceeds may have been invested together with money belonging to the person in a fiduciary position, in a purchase. He may have bought land with it, for instance, or he may have bought chattels with it. Now, what is the position of the beneficial owner as regards such purchases? I will, first of all, take his position when the purchase is clearly made with what I will call, for shortness, the trust money, although it is not confined, as I will shew presently, to express trusts. In that case, according to the now well-established doctrine of equity, the beneficial owner has a right to elect either to take the property purchased, or to hold it as a security for the amount of the trust money laid out in the purchase; or, as we generally express it, he is entitled at his election either to take the property, or to have a charge on the property for the amount of the trust money. But in the second case, where a trustee has mixed the money with his own, there is this distinction, that the cestui que trust, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee. The moment you get a substantial portion of it furnished by the trustee, using the word 'trustee' in the sense I have mentioned, as including all persons in a fiduciary relation, the right to the charge follows. That is the modern doctrine of equity ..."
There then follows this passage showing the width of the application of the principle:
"Has it ever been suggested, until very recently, that there is any distinction between an express trustee, or an agent, or a bailee, or a collector of rents, or anybody else in a fiduciary position? I have never heard, until quite recently, such a distinction suggested. It cannot, as far as I am aware (and since this court sat last to hear this case, I have taken the trouble to look for authority), be found in any reported case even suggested, except in the recent decision of Fry J. [Ex parte Dale & Co. (1879) 11 Ch.D. 772,] to which I shall draw attention presently. It can have no foundation in principle, because the beneficial ownership is the same, wherever the legal ownership may be."
There is the following short passage, at p. 710:
"Now that being the established doctrine of equity on this point, I will take the case of the pure bailee. If the bailee sells the goods bailed, the bailor can in equity follow the proceeds, and can follow the proceeds wherever they can be distinguished, either being actually kept separate, or being mixed up with other moneys."
Finally, this sentence, at p. 711:
"Therefore, there is no difficulty in following out the rules of equity and deciding that in a case of a mere bailee, as Fry J. has decided, you can follow the money."
These passages are clearly most apposite, since they refer to the position of a mere bailee, and were strongly relied upon by Mr. Lincoln. Mr. Pickering sought to avoid them by saying that they were obiter or had in some way been modified in In re Diplock [1948] Ch. 465 and that it was necessary that there should be some express or constructive trust before the equitable doctrine could apply. My attention was not drawn to any passage in In re Diplock criticising or modifying, in any way, the statements of principle which I have quoted. Although I fully recognise that in considering this problem I find myself in a most unfamiliar field, I feel it my duty to follow and apply those statements. Mr. Pickering drew my attention to two authorities as illustrating the simple debtor/creditor relationship, namely, King v. Hutton [1900] 2 Q.B. 504 and Henry v. Hammond [1913] 2 K.B. 515. It is unnecessary to refer to these in detail, save to say that the former makes it clear that the special facts of each case are crucial in determining whether there is a simple debtor/creditor relationship, although the intention of the parties as ascertained from the terms of their contract shows that some kind of fiduciary relationship exists. The preservation of ownership clause contains unusual and fairly elaborate provisions departing substantially from the debtor/creditor relationship and shows, in my view, the intention to create a fiduciary relationship to which the principle stated in In re Hallett's Estate, 13 Ch. D. 696 applies. A further point made by Mr. Pickering was that if the plaintiffs were to succeed in their tracing claim this would, in effect, be a method available against a liquidator to a creditor of avoiding the provisions establishing the need to register charges on book debts: see section 95 (1) (2) (e) of the Companies Act 1948. He used this only as an argument against the effect of clause 13 contended for by Mr. Lincoln. As to this, I think Mr. Lincoln's answer was well founded, namely, that if property in the foil never passed to the defendants with the result that the proceeds of sub-sales belonged in equity to the plaintiffs, section 95 (1) had no application.
The plaintiffs accordingly succeed and are entitled to the reliefs sought in paragraph 1 of the prayer, to the reliefs sought in paragraphs 2 and 3 of the prayer; and also to a declaration that they have a charge to the extent of £335,152.66 over the account of the receiver-manager of the defendants, with Hume Corporation Ltd., and an order that he pay over that sum to the plaintiffs' solicitors. Their claim for the price of goods sold is adjourned sine die with liberty to apply. It will only become relevant in the event of my decision being reversed in a higher court.
ORDER
Judgment for plaintiffs with costs.
Crown Copyright acknowledged
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