(D) THE ROLE OF DISCRETION

One of the key policy questions which underpins proprietary restitutionary claims concerns whether a normative approach can be adopted when considering such claims, by virtue of which the identification and vindication of proprietary rights would depend on the discretion of the court by reference to notions of justice and Equity. Such a discretionary approach has been advocated by a number of judges^[1] and commentators,^[2] especially those who consider that property rights in substitute property should be recognized by virtue of the unjust enrichment principle. But such a discretionary approach was clearly rejected by the House of Lords in Foskett v McKeown,^[3] most notably by Lord Millett who said:^[4] ‘Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is “fair, just and reasonable”. Such concepts, which in reality mask decisions of legal policy, have no place in the law of property.’^[5]

Lord Browne-Wilkinson also recognized that proprietary claims do not depend on any discretion vested in the court; such cases involve ‘hard-nosed property rights’.^[6] But he did accept that a proprietary interest might not be recognized if such recognition would be ‘unfair’.^[7] This notion of fairness is sometimes encountered in the context of the tracing rules,^[8] but it clearly contradicts the fundamental principle that the recognition of proprietary rights is rule-based. It would be better to rationalize the decision not to recognize a proprietary interest by reference to principled defences rather than rely on the uncertainty of concepts such as fairness and equity. This is an area where certainty is paramount for a number of reasons, particularly because a consequence of recognizing proprietary rights may be that the claimant gains priority over the defendant’s unsecured creditors if the defendant becomes bankrupt or insolvent, so the award of such a remedy will be to the prejudice of these other creditors, and also has a proprietary claim against the innocent recipients of the property if they have not provided value for their receipt. Therefore, the court must always be vigilant against affording the claimant excessive protection at the expense of third parties. This has been recognized in a number of cases. For example, in Re Stapylton Fletcher Ltd⁷⁰ Judge Paul Baker QC said: ‘The court must be very cautious in devising . . . interests and remedies which erode the statutory scheme for distribution on insolvency. It cannot do so because of some perceived injustice arising as a consequence only of the insolvency.’⁷¹

Ultimately, the court must simply strive to balance the interests of two innocent parties, namely the claimant and the defendant’s creditors, by reference to clear principles. In doing so one of the most important considerations relates to whether or not the claimant can be considered to have taken the risk of the defendant’s insolvency or bankruptcy.⁷² For, if the claimant did take the risk, or can be deemed to have taken it, there is no reason why the claimant’s claim should be preferred to that of the defendant’s other creditors and so the claimant should rank equally with those creditors.^[9] The principal situation where it is acceptable to prefer the claimant’s claim over those of the defendant’s other creditors is where the claimant was completely unaware that property had been taken from him or her, for example where a thief has stolen some of the claimant’s property. In such a case it is perfectly acceptable that the claimant be afforded proprietary protection since he or she was not given the opportunity to arrange for the restitutionary claim to be secured. Equally, if the claimant made arrangements to obtain a security interest but for some reason this security is invalid, it should be acceptable that the claimant be afforded a degree of proprietary protection to fulfil his or her legitimate expectations that any claim against the defendant would be secured.^[10]

It does not follow from this emphasis on principle that there is no role for discretion in the recognition of proprietary rights. In fact, judicial discretion properly defined inevitably involves discretion exercised with reference to principle. This was recognized by Hart^[11] who argued that discretion is fundamentally different from arbitrary choice: discretion by its nature is guided by rational principles, so that a decision which is not susceptible to principled justification is not an exercise of discretion at all but involves an arbitrary choice. It follows that there is no reason why the recognition and enforcement of proprietary rights should not be modified by the exercise of judicial discretion, as long as this is done on a principled basis. This will prove to be significant later when equitable proprietary rights are considered with reference to the so-called remedial constructive trust.^[12]

• [1] For example, Sir R Walker, ‘Foskett v McKeown’ [2000] RLR 573, 575.
• [2] Burrows, ‘Proprietary Restitution’, 423-8; C Rotherham, ‘Tracing Misconceptions in Foskett v McKeown[2003] 11 RLR 57. See generally C Rotherham, Proprietary Remedies in Context (Oxford: Hart Publishing,2002); F Finch and S Worthington, ‘The Pari Passu Principle and Ranking Restitutionary Rights’ in FD Rose(ed), Restitution and Insolvency (Oxford: Mansfield Press, 2000), 1.
• [3] [2001] 1 AC 102. 65 Ibid, 127.
• [4] 66 Cf Lord Hope who said, ibid 120, that, since there was no principle or authority to assist with the division
• [5] of the property in that case, it should be divided in such proportions as were equitable, having regard to theequities affecting each party.
• [6] Ibid, 109. 68 Ibid. 69 Re Diplock [1948] Ch 465, 548. 70 [1994] 1 WLR 1181, 1203
• [7] 71 See also Re Polly Peck International plc (No 2) [1998] 3 All ER 892, 827 (Mummery LJ).
• [8] 72 Burrows, ‘Proprietary Restitution’, 423-8.
• [9] This may be the case, for example, where the claimant entered into a transaction with the defendantwhich was void. See Lord Goff in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 684.
• [10] See p 640, below.
• [11] HLA Hart, ‘Discretion’, written in 1956 and published in (2013) Harvard Law Review 652.
• [12] See p 595, below.