b) Non-physical things

The majority of the House of Lords, however, refused to extend the tort of conversion to a case of interference with a contractual right.80 The key point was forcefully made by Lord Hoffmann:81

By contrast with the approving attitude of Cleasby J82 to the protection of rights of property in chattels, it is a commonplace that the law has always been wary of imposing any kind of liability for purely economic loss. The economic torts which I have discussed at length are highly restricted in their application by the requirement of an intention to procure a breach of contract or to cause loss by unlawful means. Even liability for causing economic loss by negligence is very limited. Against this background, I suggest to your Lordships that it would be an extraordinary step suddenly to extend the old tort of conversion to impose strict liability for pure economic loss on receivers who were appointed and acted in good faith.

In OBG then, as in Spartan Steel (discussed in Section 2.1),83 the court’s characterization of a particular form of loss as ‘purely economic’ was decisive. In Spartan Steel, the defendant contractors were liable for the economic loss suffered by the claimants as a result of the damage to those ingots which, at the time of the power cut, were in the process of being melted. This consequential loss was recoverable as it flowed from the defendant’s breach of their duty not carelessly to physically interfere with the claimants’ physical things. In contrast, the economic loss flowing from the claimants’ admitted inability to melt further ingots was characterized as non-recoverable ‘purely’ economic loss: such loss did not flow from a breach of duty as there is no general duty not to interfere with a particular use of another’s things. In OBG, the defendant receivers were liable for any economic loss suffered by the claimants as a result of their taking over of the claimant’s land and goods, as such loss flowed from a breach of the defendants’ duty not deliberately to physically interfere with the claimant’s things. In contrast, the economic loss supposedly flowing from the purported settlement of the contractual claim was characterized as non-recoverable ‘purely’ economic loss. This characterization was based on the fact that there is no general duty not to interfere with another’s contractual rights.

As was made clear in Lord Hoffmann’s speech, the effect of a contract between A and B on a stranger’s duties to B has been worked out through the economic torts and the position has been reached that such duties are limited to a duty to B not to intentionally procure a breach by A of A’s contract with B and a duty to B not to cause B loss by the use of unlawful means. Lord Nicholls, in his dissenting judgment, readily accepted that the economic torts have this narrow compass84

80In OBG Ltd and ors v United Kingdom 2011, [96] the European Court of Human Rights (Fourth Section) dismissed OBG’s application that United Kingdom had failed to provide adequate protection for OBG’s contractual right (a possession protected by Article 1 of Protocol 1 to the European Convention of Human Rights) as ‘manifestly ill-founded’.

81OBG v Allan 2008, [99].

82[Those comments were made in Fowler v Hollins 1872, 639, explaining the strict liability in conversion as ‘founded upon what has been regarded as a salutary rule for the protection of property, namely, that persons deal with the property in chattels or exercise acts of ownership over them at their peril.’]

83Spartan Steel & Alloys Ltd v Martin & Co. Ltd 1973.

84OBG v Allan 2008, [174]–[195].

The present chapter, however, has arrived at a position very similar to that of Smith, but by the express application of a Hohfeldian analysis. The ‘right to exclude’ is of interest to outsiders precisely because it consists of a general prima facie duty not to physically interfere, deliberately or carelessly, with A’s thing. Further, Hohfeld explains why the owner’s varied and specific uses of a thing are of no concern to outsiders: the owner’s ‘right to use’ is a ‘liberty’, meaning that it does not denote a legal duty on outsiders to behave in a certain way, but merely expresses the owner’s freedom to use the thing. In other words, the ‘lumpiness’ of property rights can be seen to depend on the fact that such rights are defined not by focusing on the individual and varied uses that A may make of a resource, but on the general duty of the rest of the world not to interfere with a physical thing. This leads to a point worth noting here: when we move away from physical things, and into the realm of choses in action or intellectual property, this ‘lumpiness’ disappears, as there is no physical thing around which the general duty owed by the rest of the world can coalesce. A copyright, for example, can be seen to consist in a series of general duties, owed to a copyright holder by the rest of the world, to refrain from particular activities (such as the reproduction of a copyrighted work). In sharp contrast to the core property model, however, the precise content of these duties has to be specified, generally by legislation, and the duties cannot be explained as simply a duty not to physically interfere, deliberately or carelessly, with a particular physical thing. This may help to explain why, as recently noted by Mulligan,92 the numerus clausus principle currently plays no part in intellectual property law: as there is no physical thing around which an intellectual property right can be coherently defined, there is no reason why the varied specific duties imposed on the rest of the world cannot be fractured and disaggregated.

c) Equitable property rights

There is, of course, a long-standing and continuing debate as to whether equitable property rights, such as the right held by a beneficiary of a trust, can usefully be seen as property rights.93 That debate cannot be fully explored here. Nonetheless, two points are worth making. First, the bundle of rights approach may contribute to the view that the establishment of a trust is a means for A, an owner of property, to separate out a right to use or benefit from A’s thing, and to confer that right on B, the beneficiary of the trust. On this view, B’s right must be seen as proprietary as it comprises that ‘cardinal’ feature of ownership: the right to use and benefit from a resource. A Hohfeldian perspective, however, helps us to see that this analysis involves a significant misunderstanding of the effects of a trust. When A sets up a trust, A comes under particular duties to B. The duties owed to A by a stranger such as X do not change; nor does X come under any immediate duty to B. The establishment of a trust is best seen as a ‘process of cumulation, and not division’.94

92Mulligan 2013.

93For recent contributions to this debate see e.g. Nolan 2006; McFarlane 2008, 23–32 and 206–66; McFarlane and Stevens 2010; Edelman 2013.

94Jones 1998.

As a judge of the High Court of Australia put it: ‘an equitable interest is not carved out a legal estate but impressed upon it’.95

For example, consider the case in which A, without authority, makes a gift of a right held on trust to X, and X then disposes of that right without retaining any traceable proceeds of it, and before having acquired knowledge of the initial trust. In such a case, B can make no claim against X.96 This is the case even though X is not a bona fide purchaser for value without notice of the trust, and even though X, by his deliberate action, has clearly interfered with the use and benefit derived by B from the trust asset. Similarly, in cases where the trust relates to a physical thing, the courts have not recognized a duty of X to B not to interfere with the physical thing; such duties, both before and after the creation of the trust, are owed to A.97 This state of affairs is perfectly consistent with the fact that A can establish a trust in B’s favour without any objective signs (such as writing or even the provision of consideration) that might alert X to the existence of the trust; and that the particular use or benefit that a trust allocates to B (where B is one of a number of trust beneficiaries) can take almost any form: in other words, there is no numerus clausus of trust rights.

On this view, then, in a case where A holds a property right in a physical thing on trust for B, the establishment of a trust does not affect the modularity of that right: strangers still owe the same general duty of non-interference to A, not to B. Smith has argued that, in its functioning, the trust does take advantage of a modular strategy.98 This analysis may be correct; but only if we recognize that the organizing module in relation to a trust is not a physical thing (as in the core case of property rights) but is rather another right. For example, if A has ownership of a car, and sets up a trust in B’s favour, it is clearly not the car itself that A holds on trust for B: it is A’s right to the car. It is for this reason that a trust can exist in relation to any right, even if that right is purely personal (such as a bank account), and even if it is nonassignable.99 A trust, however, must relate to the whole of a distinct right held by A:100 if, for example, A simply promises that B can share occupation of A’s land for a period,101 or that A will not make a particular use of A’s chattel, B acquires no equitable property right.102 This is because A has not come under a duty to B in relation to the whole of any distinct right held by A. Equitable property rights thus resemble legal property rights insofar as their content is not focused on particular

95Per Brennan J. in DKLR Holding Co. (No. 2) Pty Ltd v Commissioner of Stamp Duties 1982.

96See e.g. re Montagu’s Settlement Trusts 1987; Bank of Credit and Commerce International (Overseas) Ltd v Akindele 2001; Farah Constructions Pty Ltd v Say-Dee Pty Ltd 2007.

97For authorities denying the existence of such a duty see e.g. Earl of Worcester v Finch 1600; Lord Compton’s Case 1580; Leigh & Sillavan Ltd v Aliakmon Shipping Co. Ltd (The Aliakmon) 1986; MCC Proceeds Inc. v Lehman Bros. 1998.

98See Smith 2012b, 1713.

99See e.g. Don King Productions Inc. v Warren 2000; Barbados Trust Co. Ltd v Bank of Zambia

2007.

100See McFarlane and Stevens 2010, 11–12.

101See e.g. King v David Allen & Sons Billposting Ltd 1916; National Provincial Bank v Ainsworth 1965; Ashburn Anstalt v Arnold 1989.

102See e.g. Taddy & Co. v Sterious & Co. 1904; Barker v Stickney 1919.

activities (such as particular uses of a physical thing) of the right holder. They differ, however, from legal property rights as the organizing module in the case of equitable property rights—setting the limits of the duties and liabilities of strangers—is not a physical thing, but is rather a right held by A. So, where A holds a right on trust for B, Z can come under the core trust duty to B (a duty not to use a right for Z’s own benefit) but only if Z has acquired either the same right that A held on trust for B, or a right that counts as a product of that right.103

This analysis can explain what Smith has called the recursiveness of rights under a trust:104 if A holds on trust for B, B can then set up a trust of B’s right in favour of B2. This is due to the fact that the establishment of the initial trust creates a new right, which itself can be made the subject matter of a trust. It should not be assumed that property rights must have that same potential for recursiveness: if, for example, A grants B an easement, it is difficult to see how B might grant B2 an easement of that easement. Perhaps most importantly, the organization of trust rights around a primary right (the subject matter of the trust)105 can explain why, as is true where B has a purely contractual right against A, the rest of the world is not under a general duty, owed to B, of non-interference. It is because the grounds on which B establishes his or her right cannot depend on an unmediated relationship to a physical thing; rather B’s right necessarily depends on another person (in this case, the trustee) being under a particular duty to B.

It is therefore unfortunate that, in the recent case of Shell UK Ltd v Total UK Ltd, the Court of Appeal equated the position of a trust beneficiary with that of A, an owner of a physical thing. It did so when holding that, where the defendant had breached its duty not carelessly to physically interfere with A’s land, and A’s property right in the land was held on trust for B, the defendant was also liable for consequential economic loss suffered by B (and not A), at least if A was joined in any action brought by B against the defendant. The decision has been widely criticized106 and is contrary to previous case law that denies that, where A holds A’s right to a physical thing on trust for B, X is under a duty to B not to interfere with that physical thing.107 A central problem is the assumption that, B, rather than A, has the right to benefit from the land and so B, rather than A, is the ‘real owner’ of that land.108 This assumption is consistent with the model in which the creation of a trust transfers a proprietary ‘right to use’ from A to B, but ignores two key points, clear from a Hohfeldian perspective: first, the existence of the trust depends on A’s duty to B to use A’s property right in the land for B’s benefit; second, there is no

103See McFarlane and Stevens 2010. Z is under an immediate duty to A not to dishonestly assist A to breach any of A’s duties as trustee to B, but the presence of this general ancillary duty (like the general ancillary duty to B not to procure a breach by A of A’s contract with B) does not distinguish B’s right under the trust from a non-proprietary right: see McFarlane 2008.

104Smith 2012b, 21–2.

105In the term used by Gretton 2007 at 839, the right of the beneficiary is a ‘daughter’ right as its

subject matter is another right.

106See e.g. Edelman 2013; Rushworth and Scott 2010; Turner 2010; Low 2010.

107See the cases cited at n. 97. See too Douglas 2011a, 39–47.

108Shell UK Ltd v Total UK Ltd 2010, [132].