Foskett v McKeown

A beneficiary may trace trust money used with other money to acquire a single asset and elect either a proportionate beneficial share or, where available, a lien securing repayment. This vindicates property rights. It is not a discretionary response to unjust enrichment.

Premiums paid from different sources for one life policy constitute a mixed substitution. Each contributor's beneficial interest arises when the premium is paid and extends through the policy into its proceeds. It does not depend on whether that premium increased the eventual benefit or proved necessary with hindsight. Volunteers deriving title through the wrongdoer take subject to the beneficiary's proprietary interest. The proceeds are divided according to the parties' contributions to the premiums.

Mr Murphy used £20,440 held on express trust for purchasers of Portuguese land to pay the fourth and fifth premiums on a whole-life policy settled under trusts for members of his family. After his death, the insurers paid about £1 million. The purchasers claimed a proportionate beneficial share of the proceeds. The children contended that the purchasers had no proprietary entitlement, or at most a right to repayment with interest.

The Court of Appeal, by a majority, held that the purchasers could recover the misapplied premiums with interest but could not share rateably in the policy proceeds: Foskett v McKeown [1998] Ch. 265. The purchasers appealed, and the children cross-appealed. The central issues were whether the premiums could be traced through the policy into its proceeds, whether the purchasers acquired a proportionate proprietary share, and whether their other recoveries barred this claim.

1. Disposition. By a majority of three to two, the House allowed the purchasers' appeal and declared that the policy money was held for the children and purchasers in the proportions in which their respective money had funded the premiums. The children's cross-appeal was dismissed unanimously.
2. Nature of the claim. Lord Millett delivered the principal majority reasoning. Lord Browne-Wilkinson and Lord Hoffmann agreed that the claim vindicated an existing beneficial proprietary interest. It was not a claim to reverse unjust enrichment and did not depend on judicial discretion or an assessment of what was fair, just and reasonable. A beneficiary's interest continues in traceable substitutes and binds a trustee's volunteer, subject to the defence of a bona fide purchaser for value without notice.
3. Tracing and mixed substitution. Per Lord Millett, tracing identifies substitutes for property; it is distinct from both the claim and the remedy. Where a trustee uses trust money for part of the cost of one asset, the beneficiary may elect a proportionate share or, where the claim lies against the wrongdoer or a volunteer and the conditions are met, a lien securing repayment. Separate or sequential payments are equivalent to prior mixing. Innocent contributors share gains and losses rateably, while volunteers cannot obtain a better title than the wrongdoer.
4. Application to the policy. The premiums were traced first into the policy, a single chose in action, and then into the insurance money. The policy and its proceeds represented all premiums paid. The purchasers' share arose when their premiums were paid. It did not depend on whether those premiums, viewed after the event, increased the death benefit or were necessary to keep the policy in force. Lord Browne-Wilkinson and Lord Hoffmann treated the case as analogous to money mixed in a bank account.
5. Apportionment. Lord Millett preferred a more detailed calculation reflecting the policy's unit-linked and insurance components. Lord Browne-Wilkinson and Lord Hoffmann considered that unnecessary because it had not been argued. The operative declaration therefore divided the proceeds simply according to the contributions made towards the five premiums.
6. Cross-appeal. Lord Hope's reasoning on election was accepted for the dismissal of the cross-appeal. Recovery through other proceedings did not extinguish the purchasers' continuing proprietary interest. The proprietary remedy was distinct from damages and was not reduced merely because compensation had been obtained elsewhere.

1. House of Lords: Allowed the purchasers' appeal by a majority of three to two, declared proportional beneficial ownership of the policy proceeds, and dismissed the children's cross-appeal: Foskett v McKeown [2001] 1 AC 102.
2. Court of Appeal: By a majority, reversed the trial judge's decision in favour of a proportionate share. It held that the purchasers were entitled only to repayment of the misapplied premiums with interest: Foskett v McKeown [1998] Ch. 265.
3. Trial court: The trial judge decided in favour of the purchasers' claim to a proportionate share. The citation is not stated in the judgment.