Foskett v. McKeown and Others

This case decides that where a trustee wrongfully uses trust money to pay part of the cost of a life assurance policy, the beneficiaries of the trust may, by tracing, assert a proprietary interest in the policy (and its proceeds) proportionate to their contribution. The House held that this is a case of mixed substitution: the trust money became part of a single chose in action (the policy) and the innocent contributors are entitled to share rateably according to their respective contributions. The decision distinguishes proprietary tracing from unjust enrichment and confirms that equitable tracing principles (mixed substitution) can give rise to a proportional proprietary share rather than being limited to a mere personal claim or lien. The court also considered the special accounting issues posed by unit-linked policies and indicated that, in principle, shares should reflect the relative value of contributions when measured in the relevant units of account.

This appeal concerns competing claims by two innocent groups to life insurance proceeds paid under a whole-life, unit-linked policy taken out by Timothy Murphy. The purchasers of plots in Portugal (whose deposits had been misappropriated by Murphy) sought a proprietary share of the death benefit, asserting that some annual premiums were paid with their money and that those sums could be traced into the policy proceeds. The trustees for Murphy's children (the beneficiaries under the policy trust) resisted, arguing at most for repayment of the misapplied premiums and that the purchasers had no proprietary interest in the policy proceeds.

Procedural posture: The Court of Appeal ([1998] Ch. 265) by a majority limited the purchasers to recovery of the sums misapplied (premiums plus interest) and refused a pro rata share in the policy proceeds; Morritt L.J. dissented. The purchasers appealed to the House of Lords.

Issues framed:

• whether trust money misapplied to pay premiums can be traced into the policy proceeds so as to give a proprietary interest in those proceeds (mixed substitution);
• whether the purchasers were limited to a personal remedy or an equitable lien rather than a proprietary share;
• how, if a proprietary share is recognised, the shares should be calculated in the context of a unit-linked life policy;
• whether unjust enrichment or equitable considerations (including the equities between innocent parties) barred or limited the purchasers' claim.

Reasoning and outcome: The majority in the House (notably Lords Millett, Hoffmann and Browne-Wilkinson) held that tracing rules permit the purchasers to assert a proportionate proprietary interest in the policy and its proceeds because the trust money became indistinguishably mixed with the asset represented by the policy (a mixed substitution). The court treated tracing as a process of identifying substitute assets and distinguished it from unjust enrichment. The Lords emphasised that ownership of the chose in action (the policy) depends on whose money was used to acquire it, and that the appropriate remedy is proprietary: co-ownership rateable to contributions. The House accepted that unit-linked features raise accounting questions and that in principle contributions should be valued in the relevant units, but declared generally that the policy moneys should be divided according to contributions. The purchasers' appeal was allowed and the children's cross-appeal dismissed.

Appeal allowed; the purchasers were entitled to a proprietary share of the policy proceeds proportionate to their contributions. The House held that the trust money paid as premiums became part of the chose in action (the policy) by mixed substitution and therefore the purchasers could trace into the policy and its proceeds. The court treated tracing as vindication of property rights (not merely unjust enrichment) and confirmed that where trust money forms part of the cost of acquiring an asset the beneficiary may elect a proportionate proprietary share rather than be confined to a lien. The cross-appeal by the children's trustees was dismissed.

Appeal from the Court of Appeal (Civil Division) which delivered judgment at [1998] Ch. 265 (majority reversing the trial judge on proprietary relief and limiting purchasers to repayment of misapplied premiums). The House of Lords reversed the Court of Appeal's majority on the principal point and allowed the purchasers' appeal; the cross-appeal by the children was dismissed.