I. Introduction
The equitable defence of bona fide purchase for value without notice has been, and remains, a foundational rule of equity jurisprudence. As Lord Briggs recently observed of the doctrine: “Equity has a special fondness for bona fide purchasers for value without notice. That is why they are called equity's darlings”.Footnote 1 The defence has traditionally served a foremost role in settling priority disputes between legal and equitable property rights in the conveyancing context,Footnote 2 but has also demarcated the outermost limits of equitable intervention; for against equity's darling, a court of equity does not exercise jurisdiction.Footnote 3 The defence continues to play a similar role in equitable doctrine today,Footnote 4 though within a much narrower compass. In a small and ever-diminishing corner of unregistered conveyancing in England and Wales, the defence still operates.Footnote 5 However, it is really within the context of equitable proprietary remedies, such as the range of claims available following a breach of trust,Footnote 6 or claims to rescind or rectify voidable transfers of title,Footnote 7 that bona fide purchase retains an ongoing practical significance.
We nowadays treat the acquisition of the legal estate as a necessary precondition to raising the defence.Footnote 8 However, in 1861, Lord Westbury laid down the following rule in Phillips v Phillips: “[W]here there are circumstances that give rise to an equity as distinguished from an equitable estate – as for example, an equity to set aside a deed for fraud, or to correct it for mistake – and the purchaser under the instrument maintains the plea of purchase for valuable consideration without notice, the Court will not interfere.”Footnote 9
Though Lord Westbury did not explicitly say as much in the gobbet above, His Lordship has been subsequently interpreted as holding that, when faced by a prior “equity”, the bona fide purchaser of even an equitable interest may also plead the defence.Footnote 10 Phillips therefore represents an exception to the otherwise general approach that disputes between successive equitable entitlements are resolved using the “first in time” priority rule.Footnote 11 Where both parties assert equitable rights, the reasoning in Phillips remains practically important in demarcating those disputes resolved by the bona fide purchase defence, from those resolved using the equitable priority rules.Footnote 12 For this reason, the rule is not yet pure legal history but still belongs in practitioners’ texts.
This paper concerns the proper interpretation of Phillips v Phillips. The decision has been insightfully analysed by Dominic O'Sullivan Q.C. in a paper in which he argues that Lord Westbury has been widely, and consistently, misunderstood.Footnote 13 In truth, Lord Westbury would not have resolved disputes between “equities” and equitable interests by using the title-clearing defence.Footnote 14 Rather, on Lord Westbury's true view, disputes between “equities” and equitable interests were always resolved using the “first in time” priority rule.Footnote 15 Such is clear, O'Sullivan argues, from Lord Westbury's decision in Eyre v Burmester, delivered less than a year after Phillips, which saw a prior “equity” to rescind come head-to-head against a subsequent equitable interest acquired by a bona fide purchaser.Footnote 16 Despite this, Lord Westbury seemingly disregarded his statement in Phillips and applied the “first in time” rule in favour of the prior, rescinding-claimant.Footnote 17 Lawyers subsequently overlooked Eyre v Burmester with the net-result that a number of taxonomical problems attributable to the application of the rule in Phillips have arisen; namely, the confusion as to which entitlements are “mere equities” and why.Footnote 18
Although O'Sullivan's article is almost two decades old, it remains the most thorough, contemporary exegesis of the decision in Phillips within that decision's historical context.Footnote 19 This paper seeks to revisit that context to argue against a key pillar of O'Sullivan's thesis; namely, Lord Westbury's true intentions behind the judgment in Phillips v Phillips.Footnote 20 In truth, Lord Westbury meant what he said in Phillips. Not only did O'Sullivan not accurately interpret Eyre v Burmester, but his paper also overlooked a subsequent dispute in the same litigation that puts Lord Westbury's views beyond doubt.Footnote 21
The paper shall first elucidate the reasoning in Phillips within its historical context; we shall see that Lord Westbury undertook an extensive survey of bona fide purchase within the legal and procedural landscape of 1861 with the likely aim of addressing contemporary uncertainty surrounding the defence. O'Sullivan's argument shall then be considered in light of the Eyre v Burmester litigation and rejected in Sections III and IV. A fifth section will then defend the rule in Phillips against that claim that the application of its ratio rests on an uncertain distinction between “equities” and equitable interests.Footnote 22 Lord Westbury only used this terminology to articulate a conceptual argument that bona fide purchase had a distinct function from that performed by the equitable priority rules. Whereas bona fide purchase enabled the defendant to keep a right in specie free from a claim to that same right,Footnote 23 the equitable priority rules governed disputes between a number of equitable proprietary rights.Footnote 24
II. Phillips v Phillips (1861)
Phillips v Phillips was an equitable priority dispute between an equitable annuitant and a subsequent equitable interest arising under a marriage settlement. Both at first instance,Footnote 25 and before Lord Westbury,Footnote 26 the defendants’ plea of bona fide purchase was dismissed. Rather, the dispute was resolved by the “first in time” equitable priority rule which, in the absence of postponing conduct,Footnote 27 ranks equitable interests in order of their creation. On the facts of Phillips, this rule gave priority to the claimant's prior annuity.
The dispute originated in the intestate death of William Phillips in 1820, when his eldest son and heir-at-law, John Phillips, made a number of provisions for the family.Footnote 28 In February 1820, John signed a deed under which he promised to: (1) pay each of his younger siblings £150; and (2) granted an annuity of £20 per annum to his youngest brother, also William Phillips, payable upon the death of their mother, Rebecca Phillips. In return for John's undertaking, each of the younger siblings assigned their shares in their father's personal estate to him. Moreover, Rebecca Phillips promised to support the younger William financially until her death, at which time the annuity would become payable.Footnote 29 The deed recited that William Phillips senior was, at the time of his death, entitled to two legal estates both of which were mortgaged such that the legal estates were outstanding in trustees; it was the Blanaway estate that secured the younger William's annuity.Footnote 30
One year later, in May 1821, John Phillips transferred the Blanaway estate to trustees to hold on settlement in anticipation of his marriage to Mary Roberts. It was under the terms of this settlement that the defendants to the eventual suit in Phillips, John Phillips junior and George Phillips, claimed title as bona fide purchasers. A few years later, in 1825, John Phillips senior died intestate.
In December 1839 Rebecca Phillips died and William Phillips's annuity became payable.Footnote 31 The first quarterly instalment fell due the following March but was unpaid. William Phillips filed suit shortly afterwards, seeking an account and payment of the annuity together with the appointment of a receiver. By the time of suit, the equity of redemption in the Blanaway estate had devolved to John and George Phillips, which they held as equitable tenants in common.Footnote 32 Their bill answered the claimant's claim in several ways: (1) that the annuity was void for want of consideration; (2) that the suit ought properly to be enforced at law; and (3) that the claim fell within the Statute of Limitations.Footnote 33
It was only later on, at a subsequent hearing, that the defendants sought to raise the plea of bona fide purchase.Footnote 34 As the legitimate children of John and Mary Phillips claiming under the marriage settlement, the defendants could be plausibly described as “purchasers for value” of their equitable interest under the law as it then stood. There was a long-standing legal fiction that the children of a marriage were themselves parties to the settlement and so were “purchasers” of any title held under that settlement.Footnote 35 Moreover, marriage consideration had long been recognised as “valuable” consideration, both at law and in equity.Footnote 36 In terms of “notice” of the prior annuity, this had to be assessed in May 1821 at the time John Phillips senior had transferred his interest in the Blanaway estate into the settlement.Footnote 37 This was the most difficult element of the plea for the defendants to meet,Footnote 38 but they relied upon: (1) their father's covenant of 1821 that the Blanaway estate was unencumbered save for a prior legal mortgageFootnote 39; and (2) their mother's affidavit, sworn at the hearing, in which she denied any knowledge of the annuity at the time of her marriage.Footnote 40
Placing the substantive elements of the plea to one side however, the defendants’ main difficulty was a rule of pleading; the issue was that they had sought to raise the plea by way of an affidavit subsequently to, and separately from, their initial answer to the claimant's bill. That the defendants tried to plead bona fide purchase at the hearing in this way was troublesome in two respects: (1) they had not pleaded the defence at the time of their initial answer to the claimant's bill; and (2) nor had they explicitly denied notice in their answers.Footnote 41 This raised a basic issue of procedural fairness: then, as now, the broad purpose of pleading was to establish the arguments that were central to the dispute and therefore notify each side of the issues they would need to address at the hearing.Footnote 42 Yet, more prosaically, there was an established rule of pleading that stood in the defendants’ way, and on which point they failed before Sir John Stuart V.C. at first instance.Footnote 43 It is worth briefly unpacking this point to make clear Lord Westbury's likely objectives in his judgment in Phillips.
A. The Procedural Issue
To any bill in equity, the defendant could respond in one of three ways. The defendant could “demur” (i.e. refuse to answer) a bill which contained an obvious defect or drafting error, or which failed to disclose a material claim.Footnote 44 Assuming the bill was not defective, the defendant was obliged to “answer” the bill on oath, stating whether the facts outlined in the bill were true.Footnote 45 However, if the claimant was dissatisfied with the initial answer, he or she was entitled to amend his or her original bill in order to compel further answer from the defendant.Footnote 46 This process would normally continue until the dispute had come to a head in some way and a hearing became necessary. To avoid the obligation to answer on oath, with the attendant risk of perjury, it was necessary to raise a “plea”.Footnote 47 A plea functioned by delineating the dispute to a single cause or issue which would provide a complete defence, either to the claimant's whole bill or to a particular claim within the bill.Footnote 48 Any claim to which the defendant could plead bona fide purchase was one on which the claimant could not compel an answer.Footnote 49 Frequently, this would render the entire claim redundant, with the result that the claimant's bill was dismissed entirely.Footnote 50 It was in this sense that bona fide purchase functioned as a “plea in bar” to equitable relief, thereby providing the defendant with a complete defence.Footnote 51
As a corollary of this, it had been an established rule of pleading for several decades prior to Phillips that bona fide purchase had to be pleaded alongside the defendant's “answer” to the claimant's bill.Footnote 52 This was not only so as to give the claimant fair warning, as noted above, but also because the plea's success or failure would determine the extent to which the defendant needed to answer the bill, if at all.Footnote 53 The defendants attempts to side-step this difficulty in Phillips were unsuccessful before Stuart V.C. who found against them for having surprised the claimant with new issues raised at the hearing, which deprived him “of the privilege of having questions fairly stated and fairly put in issue”.Footnote 54
Therefore, there was a procedural reason to find for the claimant in Phillips, which Lord Westbury upheld on review: “[t]he Vice Chancellor in his judgment refused to admit the defence… and I entirely agree with him in the conclusion that such a defence requires to be pleaded by the answer, more especially where an answer has been put in.”Footnote 55 However, Lord Westbury continued: “But I do not mean to rest my decision upon that particular ground because I have permitted the argument to proceed with reference to the general proposition … that the doctrine of a Court of equity was … that it would give no relief whatever to any claimant against a purchase for valuable consideration without notice.”Footnote 56
This gives important context to Lord Westbury's wider purpose in Phillips; His Lordship was not content to dismiss the suit on a point of pleading but went on to provide a substantive rationale for the procedural outcome. This observation is worth making because, given the lengths to which Lord Westbury went to explain the doctrine of bona fide purchase, it is highly unlikely that the judgment in Phillips does not represent Lord Westbury's considered view on that doctrine. The question is: why did Lord Westbury see fit to embark on this task and what exactly was he trying to achieve?
The answer is to be found by placing Phillips in its historical context; although Lord Westbury did not explicitly say as much, it is highly likely that His Lordship was seeking to address the conspicuous uncertainty surrounding bona fide purchase in this period.Footnote 57 As Fry J. would observe of the doctrine just two decades after Phillips was decided: “[c]riticisms upon old cases lie many strata deep, and eminent Lord Chancellors have expressed diametrically opposite conclusions upon the same question.”Footnote 58 For this reason, as was observed of Phillips at the time, Lord Westbury could not provide a single, overarching enunciation of bona fide purchase fit to reconcile the cases, but had to make do with a survey of those contexts in which the plea was most frequently raised.Footnote 59
As we will see more thoroughly in the next section of the paper, Lord Westbury was constrained to adopt this method because the plea was widely available across several, distinct contexts which rendered it impossible to hone the defence down to a single fact-pattern.Footnote 60 As a result, there was an authoritative view that saw bona fide purchase as an absolute bar to equity's jurisdiction, regardless of the interests held by the parties to the dispute. Lord St. Leonard's extra-curial writing gave formidable weight to decisions consistent with this view of the defence.Footnote 61 Such a view posed an obvious temptation to the defendants in Phillips,Footnote 62 who after all were purchasers of an equitable interest for marriage consideration faced with a prior equitable interest.Footnote 63
Therefore, Lord Westbury's implicit aim in Phillips was to explain both: (1) why the defence of bona fide purchase was, for reasons of substance, unavailable to the defendants; and (2) why their dispute was instead to be resolved using the “first in time” priority rule.Footnote 64 The distinction between “equities” and “equitable interests” in his third category of bona fide purchase served both ends simultaneously by predicating each rule's distinct sphere of operation upon an initial classificatory exercise.Footnote 65 This served to recharacterise bona fide purchase as a relatively narrow, instance-specific doctrine quite distinct from the equitable priority rules. By this means, Lord Westbury had rejuvenated an orthodoxy first laid down by Lord Nottingham,Footnote 66 but which had since been obscured by two centuries of often inconsistent authority.
With this outline of the context in which Phillips was decided, we can better appreciate Lord Westbury's true thoughts on bona fide purchase.
B. Lord Westbury's Substantive Reasoning
In substantive terms, Lord Westbury's primary strategy was to reason by a process of elimination. Recall that the defendant's proposition was that the bona fide purchase doctrine was an absolute bar to equity's jurisdiction and generally available to innocent purchasers regardless of the interests held by each party to the dispute. In response, Lord Westbury surveyed “the three cases in which the defence in question is most commonly found” and concluded that “[n]one of them involve the case that is now before me”.Footnote 67
1. Auxiliary jurisdiction
The first of Lord Westbury's categories of bona fide purchase was the plea's role within equity's auxiliary jurisdiction. By 1861, Chancery practitioners had become accustomed of thinking of equitable doctrine in terms of three heads of jurisdiction: auxiliary, concurrent and exclusive.Footnote 68 The three heads were premised upon the split-jurisdictions of law and equity.Footnote 69 For this reason, perhaps, it did not survive the Judicature Reforms as a classificatory scheme.Footnote 70 The auxiliary jurisdiction mostly concerned pre-suit procedure, such as the discovery of documents and the perpetuation of testimony.Footnote 71 The claimant who filed a bill under the auxiliary jurisdiction was not necessarily seeking any kind of substantive relief in Chancery.Footnote 72 Rather, the claimant would typically only come into Chancery to avail of its superior procedural mechanisms so as to unearth evidence needed for a parallel suit in the common-law courts.Footnote 73 Therefore, the claimant who filed a bill under the auxiliary jurisdiction often did so with an eye towards vindicating a legal title in the law courts.Footnote 74
However, if the claimant needed Chancery's aid to discover documents he or she believed to be in the defendant's possession,Footnote 75 such as title-deeds needed to prove the claimant's title to the legal estate,Footnote 76 then a bill for discovery would almost inevitably include a prayer for substantive relief; namely, the delivery-up of those deeds.Footnote 77 This would necessarily prejudice the defendant insofar as those title-deeds could then be used to bring an action of ejectment against him or her in the law courts.Footnote 78 From a very early period therefore, equity would not grant discovery or relief against a defendant who could plead bona fide purchase of the title-deeds,Footnote 79 giving the defendant the practical advantage of disabling the claimant from regaining possession of the land in the law courts.Footnote 80
This first category obviously had no application to the disputants in Phillips; the claimant was not seeking discovery in aid of proving a legal title but was suing on an equitable annuity.
2. Tabula in naufragio
Lord Westbury's second category was the tabula in naufragio (“plank in a shipwreck”) doctrine.Footnote 81 The paradigm context in which the doctrine applied was an equitable priority dispute: a subsequent incumbrancer would acquire an equitable interest bona fide and without notice of prior interests, only to then discover such interests; in this context, the defendant was permitted to cast around for a legal right with which to improve his or her position.Footnote 82 Though the legal right would necessarily be acquired with notice of prior interests, this did not affect the defendant so long as his or her initial purchase had been made without notice.Footnote 83 If the “shipwreck” was an equitable priority dispute, then the legal “plank” was the way by which a subsequent incumbrancer could escape the “first in time” priority rules and avail of the alternative rule that “where the equities are equal, the legal title prevails”.Footnote 84
There were two broad ways in which a legal right could help the defendant. Certain rights, such as an old satisfied term, would give the defendant the paramount right to possess land at law.Footnote 85 Depending on the circumstances, this right to possession may provide the defendant with leverage against a prior equitable incumbrancer for whom obtaining possession of the land was the first step towards realising an equitable right of redemption.Footnote 86 Alternatively, the defendant could acquire a precedent legal mortgage to which he or she could then “tack” his or her subsequent equitable mortgage.Footnote 87 In both instances it was not necessary that the legal title was vested in the defendant personally; it would suffice if the right was held by a trustee on the defendant's behalf thereby giving the defendant the “better right” to call for the legal title as against prior incumbrancers.Footnote 88
The defendants in Phillips sought to bring themselves within the scope of the tabula in naufragio doctrine by arguing that the fact of their possession of the land constituted a “tabula” of which they would not be deprived as bona fide purchasers. This was obviously untenable: the legal tabula had to give the defendants the paramount legal right to possess the land at law; the mere fact of possession of the land did not qualify.Footnote 89 As Lord Westbury noted: “[t]he purchaser will not be deprived of anything that gives him a legal right to the possession, but the possession itself must not be confounded with the right to it.”Footnote 90 Indeed, the freehold estates were vested in legal mortgagees who did not hold those estates on trust for the defendants. Moreover, there was no “practical advantage” to securing possession of the land against a prior, equitable annuitant who did not have any right to redeem specific land. In short, there was no analogy to draw between the dispute in Phillips and the typical fact-pattern in which the tabula in naufragio doctrine operated.
3. The third category: “equities” and “equitable interests”
It is worth our setting out the third of Lord Westbury's categories of bona fide purchase again in full: “[W]here there are circumstances that give rise to an equity as distinguished from an equitable estate – as for example, an equity to set aside a deed for fraud, or to correct it for mistake – and the purchaser under the instrument maintains the plea of purchase for valuable consideration without notice, the Court will not interfere.”Footnote 91
We should pause here and make three observations. First, Lord Westbury had set himself the task of surveying the extant legal landscape to gather together common instances of the plea, and therefore, His Lordship was obliged to acknowledge a significant number of cases in which the court had recognised bona fide purchase as a defence against claims to rescind or rectify a deed, whether the defendant had acquired a legal estate,Footnote 92 or an equitable interest.Footnote 93 By 1861, these decisions were not few and must have been present to Lord Westbury's mind.Footnote 94 However, no prior decision within this line of authority had phrased the defence's availability in terms of an initial distinction between “equities” and “equitable interests”Footnote 95; though the phraseology was not novel, the use of it to distinguish the title-clearing defence from the equitable priority rules represents an original contribution by Lord Westbury.Footnote 96
Therefore, and second, it is highly unlikely that Lord Westbury intended to exclude bona fide purchasers of equitable interests from his third category. Though strictly the third category was expressed in such a way as to be agnostic as to the type of right acquired by the defendant,Footnote 97 the distinction between “equities” and “equitable interests” would have otherwise been redundant if Lord Westbury had intended to limit the defence to those who had acquired legal rights in the way O'Sullivan suggests.Footnote 98 Finally, the language vis-à-vis bona fide purchase in the gobbet above is extremely clear; if Lord Westbury had meant to say that the defence was not available to the purchaser of an equitable interest against a prior equity then His Lordship chose his words uncharacteristically poorly.Footnote 99
In any event, Lord Westbury used the distinction between “equities” and “equitable interests” to dispose of the defendants’ attempt to raise the plea in Phillips. The claimant was not seeking to rescind nor to rectify the marriage settlement under which the defendants’ claimed. Indeed, the claimant did not have any kind of an “equity” but a vested equitable interest, with the result that “grantees and incumbrancers claiming in equity take and are ranked according to the dates of their securities; and the maxim applies, ‘Qui prior est tempore potior est jure’”.Footnote 100
C. Phillips: Concluding Remarks
Lord Westbury did not manage to quell the uncertainty surrounding bona fide purchase entirely, but it was no small achievement that Phillips was accepted by near-contemporaries as having conclusively delineated the equitable priority rules from bona fide purchase.Footnote 101 Within 30 years of the decision in Phillips, Ames was able to state in the inaugural issue of the Harvard Law Review that:
It seems to have been a common opinion in early times that a court of equity would give no assistance against a purchaser for value without notice. But, in Phillips v Phillips, which at once became, and has since continued to be, the leading authority on this subject, this doctrine, which Mr. Sugden [the Lord St. Leonards] strenuously defended to the last, was definitively rejected.Footnote 102
By way of his survey of the doctrine, together with his method of reasoning by process of elimination, Lord Westbury established that bona fide purchase was not generally available to any-and-all purchasers who could discharge the elements of the plea. For O'Sullivan, the outline above does indeed represent orthodoxy,Footnote 103 but that orthodoxy is itself the product of a consistent misinterpretation of Lord Westbury's reasoning.Footnote 104 In O'Sullivan's analysis, Lord Westbury's true approach to bona fide purchase and the equitable priority rules was very different from that presented above. We are now in a sure position to evaluate O'Sullivan's argument.
III. O'Sullivan's Analysis
There are two broad limbs to O'Sullivan's thesis concerning Lord Westbury's views on bona fide purchase. First, concerning bona fide purchase, O'Sullivan maintains that Lord Westbury did not in truth think that the defence was available to the purchaser of an equitable interest when faced with a prior “equity” to rescind.Footnote 105 Rather, Lord Westbury would have limited it to those purchasers who had acquired a legal right or advantage on the occasion of their purchase.Footnote 106 O'Sullivan claims that we can see evidence for this view in Phillips in which, as we saw above, Lord Westbury rejected the defendants’ argument that their factual possession of land gave them a “legal advantage” which, as bona fide purchasers, a court of equity would not deprive them.Footnote 107
O'Sullivan buttresses this interpretation of Phillips by reference to Lord Westbury's decision in Eyre v Burmester, in which the demarcation between bona fide purchase of an equitable interest and the “first in time” priority rule was relevant to the outcome. The claimant Eyre had been granted a legal mortgage over several Irish estates owned by his solicitor, John Sadleir. Eyre's mortgage was registered in December 1854.Footnote 108 However, Sadleir was deeply indebted to a bank in London from whom he then sought to borrow a further £95,000. The bank agreed and had advanced £75,000 by early August 1855 before its solicitor discovered the prior mortgage to Eyre.Footnote 109 The bank refused to proceed unless Sadleir got a release of Eyre's mortgage. Sadleir convinced the bank that he could secure the release by offering Eyre alternative securities; satisfied by this, the bank forwarded the remaining money to Sadleir and the mortgage was completed.Footnote 110
It was not until October 1855 that Sadleir convinced Eyre to release his mortgage in exchange for a number of securities; in this transaction, although Eyre had acquired a legitimate mortgage over another estate in Ireland, Sadleir had also handed him forged shares and promissory notes.Footnote 111 This was sufficient fraud to render Eyre's release voidable.Footnote 112 The legal estates reconveyed to Sadleir remained with him until his suicide in February 1856 and were never transferred to the bank's nominated trustees.Footnote 113 In June 1857, the estates were ordered to be sold and the proceeds were transferred to the bank; it was not until June 1858 that Eyre filed a bill to rescind the release and claim a share of the proceeds commensurate with his original mortgage.Footnote 114
In prior litigation before the Lord Chancellor in Ireland, the bank had successfully pleaded bona fide purchase for value without notice of Sadleir's fraud upon Eyre.Footnote 115 The Lords held the defence inapplicable on the facts because the bank had failed to get a transfer of a legal estate from Sadleir before he committed suicide. As Lord Westbury noted: “A purchaser for valuable consideration without notice, will not be deprived by a Court of equity of any advantage at law which he has fairly obtained for his protection. But in the present case the estate reconveyed by Eyre, remained in Sadleir, and was never conveyed by Sadleir to the bank.”Footnote 116
O'Sullivan interprets this as a statement of principle; bona fide purchase only protected a legal right or advantage, such that the defence was not available to the bank on the facts of Eyre v Burmester. O'Sullivan observes: “The indications are that for Lord Westbury, save in the special case of tabula in naufragio, the availability of the plea of bona fide purchase did not turn on whether the defendant purchased a legal or equitable interest, but on whether it was raised to protect a legal right or advantage he had obtained in making the purchase.”Footnote 117
This leads to the second limb of O'Sullivan's argument. Although, in Phillips, Lord Westbury unambiguously distinguished “equities” from “equitable interests” in his third category of the defence, O'Sullivan maintains that “[i]t is however not clear that Lord Westbury also says that the general rule (that rules of equitable priority and… not the plea of bona fide purchase determine the priority of successive equitable interests in property) only applies to interests that are not “equities’”.Footnote 118 Lord Westbury did not therefore truly intend the distinction to demarcate bona fide purchase from the “first in time” priority rule.
Once more, the evidence in support of this second limb is drawn from Eyre v Burmester; as we saw above, Lord Westbury seemingly disallowed the defence because the bank had not acquired the legal estate. Insofar as the legal estates remained in Sadleir at the time of his death, counsel for the bank acknowledged that its mortgage was purely equitable vis-à-vis the estates included in the bank's security,Footnote 119 but which had previously been released to Sadleir by Eyre.Footnote 120 The Lords accepted that the bank had purchased this interest without notice of Sadleir's fraud upon Eyre. Given the bank's bona fide acquisition of an equitable mortgage without notice, Lord Westbury was faced with the exact fact-pattern of the third category of the defence he had previously outlined in Phillips v Phillips. Nevertheless, Lord Westbury did not follow that rule but instead applied the “first in time” priority rule in Eyre's favour. It follows that Lord Westbury's true view was that equities to rescind “registered” within the equitable priority rules and were not therefore subject to the plea of bona fide purchase. O'Sullivan concludes:
Thus the innocent purchaser of an equitable interest in property could not plead bona fide purchase as against a prior claim to recover that property on rescission; the dispute was regulated by the principles of equitable assignment and priority; and the purchaser therefore obtained the interest subject to the claim to rescind. This is shown in his Lordship's decision in Eyre v Burmester, decided several months after Phillips v. Phillips.Footnote 121
It is therefore clear that both limbs of O'Sullivan's argument represent two prongs in the same, general attack upon the orthodox interpretation of Phillips. It is because Lord Westbury limited the defence to those who had acquired a legal right or advantage at the time of their purchase that, in a dispute between an equity and an equitable interest in Eyre v Burmester, His Lordship applied the “first in time” priority rule.
IV. O'Sullivan's Reading of Eyre v Burmester (1862)
In truth, there is little support to be found in favour of either limb of O'Sullivan's argument in Eyre v Burmester. Rather, Eyre's litigation to assert his entitlement to rescind against the defendant bank really tells against O'Sullivan's thesis. We shall reflect upon each limb of his argument to demonstrate this.
A. First Limb: Bona Fide Purchase of a Legal Right or Advantage?
Regarding O'Sullivan's view that Lord Westbury would have limited the defence of bona fide purchase to those who had acquired some legal right or advantage on the occasion of their purchase, the answer must be that the interpretive pickings are slim; neither the structure nor the language of either decision really supports O'Sullivan's view.
Turning first to Phillips, the discussion of legal right or advantage was only relevant to the defendants’ attempt to invoke the protection of the tabula in naufragio doctrine; after all, they were the subsequent equitable incumbrancers who needed the legal “plank” in the shipwreck. Indeed, the only point in the judgment at which Lord Westbury uses the language of “legal advantage” is in his discussion of that doctrine. This suggests that Lord Westbury's reference to “legal advantage” in Phillips was purely negative; it only sought to deny the defendants a route towards the tabula in naufragio and did not advance any positive conception of the defence that tied its availability to the acquisition of a legal right or advantage in the way O'Sullivan suggests.
The same point holds true of Eyre v Burmester. Again, from the defendant bank's perspective, the doctrine of tabula in naufragio made most sense given that the bank had a subsequent equitable interest. The obvious difficulty was that the bank had never acquired the legal estates from Sadleir. Counsel for the bank sought to close this gap via estoppel, arguing that insofar as the release had been made purposefully “with Eyre's knowledge and concurrence” he was estopped from denying the efficacy of Sadleir's acquisition of the legal estate for the bank.Footnote 122 The Lords unanimously rejected this argument on a finding of fact; Eyre had not even known about Sadleir's dealings with the bank at the time he had given the release. The other route towards the tabula in naufragio was to argue that, despite its non-acquisition of the legal estates, the bank nonetheless had the “better right” to call for the estates in Sadleir's hands. This argument was also rejected; given the fraud Sadleir had exercised to gain the release, it was Eyre who had the “better right” to call for those estates.Footnote 123 As Lord Westbury noted:
A purchaser for valuable consideration without notice, will not be deprived by a Court of equity of any advantage at law which he has fairly obtained for his protection. But in the present case the estate reconveyed by Eyre, remained in Sadleir, and was never conveyed by Sadleir to the bank … the claim of Eyre is against Sadleir by paramount right, to recover the estate of which Eyre had been deprived by fraud, and Sadleir acquired no interest to feed his prior contract by virtue of that fraudulent transaction.Footnote 124
Just like the reasoning by elimination we saw in Phillips, Lord Westbury's discussion of legal right or advantage in Eyre v Burmester was solely negative; the discussion sought only to reject the bank's attempt to raise the tabula in naufragio doctrine and cannot be read as a prescription that the defendant acquire a legal right or “advantage” in order to plead bona fide purchase. Moreover, as we shall see below, in a subsequent dispute in the Eyre v Burmester litigation in 1864, Lord Westbury recognised the availability of the plea to purchasers of equitable interests.Footnote 125 The first limb of O'Sullivan's argument must therefore be rejected.
B. Second Limb: “Equities” and “Equitable Interests”
Turning now turn to the second limb of the argument, O'Sullivan sees evidence in Eyre v Burmester that, faced with a dispute between an “equity” to rescind and a subsequent equitable interest, Lord Westbury disallowed the plea of bona fide purchase and resolved the dispute using the “first in time” priority rule. If this is true, the third category of bona fide purchase outlined in Phillips could not have been seriously meant. For two reasons, this inference from Eyre v Burmester is also unwarranted.
First, the third category of bona fide purchase was inapplicable on the fact-pattern of Eyre v Burmester because the bank acquired its equitable mortgage in August 1855 before Eyre was fraudulently induced to release his mortgage in October of that year.Footnote 126 The whole logic of bona fide purchase was, and remains, that the defendant acquired an interest without knowledge or notice of prior entitlementsFootnote 127; the plea had no relevance to the bank because they acquired their interest before Eyre's equity to rescind even existed. Lord Westbury acknowledged as much himself in 1864 when, in a subsequent instalment of the Eyre v Burmester litigation, he observed of the Lords’ decision in 1862: “[t]he House had not to consider the effect of any dealing, subsequent to and on the faith of [Eyre's] release, between John Sadleir and a purchaser for valuable consideration without notice”.Footnote 128
This leads to the second key point: O'Sullivan overlooks the prior role of rescission in Lord Westbury's application of the equitable priority rules to the dispute. We can see this clearly if we make explicit some of the unstated premises in Lord Westbury's reasoning on this point. To do so, it is worth remembering that, in this period, equitable rescission was understood as a court-administered remedy characterised by a high degree of judicial control and oversight.Footnote 129 A claimant who had transferred title under an impugned transaction would file a bill to have that transfer “set aside”.Footnote 130 Relief would be granted in the form of a final decree setting out instructions for a reconveyance of title, the delivery-up and cancellation of relevant conveyancing documents,Footnote 131 and the quantification of any monetary payments necessary to effect full restitutio in integrum between the parties.Footnote 132 The court's overarching aim throughout this process was to unwind the transaction ab initio.Footnote 133
A key aspect of rescission was that the transferee was held to be a constructive trustee of any property originally transferred by the claimant.Footnote 134 The award of rescission explains Lord Westbury's reasoning in Eyre v Burmester; it was because Eyre was entitled to rescind that he had the precedent equitable interest against the bank's subsequent equitable mortgage. It is true that Lord Westbury described the outcome in terms of reinstating Eyre to his original security, but placing Eyre back to his position ab initio was premised upon equitable relief by way of rescission:
Whilst the estate remained in Sadleir, so long was it liable to be pursued and recovered by Eyre… the only foundation of the bank's claim, is the mortgage by Sadleir prior to the deed of reconveyance. That mortgage and contract would bind any interest subsequently acquired by Sadleir. But under the reconveyance he obtained none; for, as between Sadleir and Eyre, the latter was still the owner, and might at any time during the life of Sadleir, by bill in equity have set aside the release, and obtained a reconveyance of the estate, and an interim injunction to restrain any alienation of it by Sadleir. This equitable title still remains unimpaired, and ought to be preferred to any claim by the bank.Footnote 135
That Eyre acquired an equitable interest by way of equitable rescission is also clear in Lord Westbury's modification of the final order: Eyre would need to account to the bank for the value of a legitimate security he had acquired from Sadleir in exchange for the release; this is best understood as an award of rescission on terms that Eyre make restitutio in integrum to Sadleir's successor in title, the bank.Footnote 136
By virtue of rescission, Eyre was entitled to a prior equitable interest as against the bank's subsequent equitable mortgage; Lord Westbury, and the other Lords, then applied the equitable priority rules to resolve the dispute. It follows that it was not Eyre's equity to rescind that “registered” within the equitable priority rules, but rather the equitable interest that arose once that Eyre's claim to rescind had been vindicated at suit.Footnote 137 It is only by overlooking rescission as an intermediate step in Lord Westbury's reasoning that O'Sullivan manages to argue that “equities” were held in Eyre v Burmester to bind subsequent interests under the “first in time” priority rule.
C. Eyre v Burmester (1864)
However, it is not simply that O'Sullivan's interpretation of Eyre v Burmester has several weak points; the conclusive argument against O'Sullivan's thesis are comments made by Lord Westbury in the Court of Chancery in 1864 in a subsequent dispute between Eyre and the bank. This decision makes clear that Lord Westbury would have allowed the plea of bona fide purchase to the purchaser of an equitable interest against a prior “equity” to rescind; His Lordship therefore meant that he said in his third category of bona fide purchase in Phillips v Phillips.Footnote 138
Of the estates that Eyre had released to Sadleir in October 1855 and which were then mortgaged to the bank, one of them, the Castle Green estate, had only given Eyre an equitable mortgage; the legal estate had been outstanding in a prior mortgagee. Therefore, Sadleir had only acquired the equity of redemption by Eyre's release. A few months later, in December 1855, Sadleir then remortgaged that equitable estate to a firm named Backhouse.Footnote 139 The London and County Bank (the defendant in the Lords’ decision in 1862) had a prior equitable mortgage but had joined in Sadleir's conveyance to Backhouse expressly undertaking to postpone its security to the subsequent equitable mortgage.Footnote 140 It did so in exchange for the lion's share of the money forwarded to Sadleir by Backhouse; of the £36,000 Backhouse advanced to Sadleir he only retained £1,000 of it and then paid £35,000 to the bank.Footnote 141 After Sadleir's suicide in February 1856, Backhouse sold the land pursuant to a court order and, after the legal mortgage had been discharged, there was a residue of £17,694 which Backhouse kept.
Eyre's bill in the 1864 suit was curiously pleaded; Eyre sought to claim the £17,694 residue for himself, not out of the hands of Backhouse, but out of the £35,000 the bank had received before the order for sale.Footnote 142 Eyre obviously could not have had a claim to the proceeds of sale that had discharged the legal mortgagee and the Backhouse mortgage; both securities had been acquired by bona fide purchasers. As such, there were no traceable proceeds of the estate against which Eyre could assert his claim to rescind. For this reason, Eyre in effect sought to claim the residue of £17,694 from the bank on the wide premise that the £35,000 it received represented the “proceeds” of Sadleir's fraud.Footnote 143 Lord Westbury rejected the argument, but outlined the circumstances in which Eyre could have been said to have had a viable claim:
It was ingeniously put in argument… that the money was obtained by the use of a fraudulent instrument, and that the person who had suffered by that use of the fraud which had been practised upon him had a right to pursue that which was obtained by means of that fraud. That might have been perfectly right if the money had been still in the hands of the Messrs Backhouse or in the Incumbered Estates Court. The Plaintiff might then have had a right to say that he was still the prior incumbrancer; and although he could not have recovered against the Messrs Backhouse, as purchasers for valuable consideration on the faith of his release, anything to the prejudice of their security, yet he might have pursued, subject to that right, the whole of the property that was comprised in the release, and also in the mortgage to the Messrs. Backhouse. But that is not the transaction. The Plaintiff admits that he cannot follow the estate. He admits that he has no claim against the Messrs Backhouse.Footnote 144
This gives us a clear insight into Lord Westbury's understanding of bona fide purchase. In the passage above, Lord Westbury considers Eyre's claim to the residue of the Castle Green estate, and explains that, because Backhouse had acquired an equitable interest as a bona fide purchaser without notice of Eyre's equity to rescind, it would be entitled to the satisfaction of its equitable mortgage before Eyre could claim the residue; an instance of the “third party rights” bar to equitable rescission.Footnote 145 In short, because Backhouse had acquired an equitable mortgage “as purchasers for valuable consideration on the faith of his release”, they took free of Eyre's equity to rescind. Of course, the obvious difficulty from Eyre's perspective was that the Backhouse mortgage exhausted the proceeds of sale. Yet Lord Westbury also rejected Eyre's claim to a share of the £35,000 received by the bankFootnote 146; in today's language, Eyre did not have a “proprietary base” in the money Backhouse had originally paid to Sadleir.Footnote 147 Moreover, the bank had given value and received legal title to the money without notice of Sadleir's fraud; it was therefore entitled to keep that money.Footnote 148
The 1864 decision in the Eyre v Burmester litigation contravenes both limbs of O'Sullivan's argument: (1) Eyre's prior mere equity to rescind did not register within the “first in time” priority rules so as to give him priority over Backhouse's subsequent equitable interest; and (2) Lord Westbury recognised that, as against Eyre's mere equity, the plea of bona fide purchase was available to the purchaser of an equitable interest. O'Sullivan's paper overlooks the 1864 decision which conclusively proves that Lord Westbury did not hold the view that O'Sullivan ascribes to him. In consequence, O'Sullivan's argument ought to be rejected.
V. Phillips v Phillips: Then and Now
If the foregoing analysis is correct, it follows that the orthodox interpretation of Phillips v Phillips is true to Lord Westbury's intentions; His Lordship did indeed consider the title-clearing defence to be available to purchasers of equitable interests against prior “equities”. In disputes concerning purely equitable entitlements, it is this initial distinction that serves to demarcate disputes resolved by bona fide purchase, and those resolved using the “first in time” priority rule. This is certainly how subsequent cases have understood the task of applying Phillips,Footnote 149 and the distinction between “equities” and interests therefore retains practical relevance today. Although competitions between proprietary interests are nowadays usually determined by statutory code, there remain certain classes of dispute in which the traditional priority rules still determine the outcome.Footnote 150
There remains a difficulty however, in that it seems that Lord Westbury solved one practical problem only by introducing another; namely, the ongoing task of identifying the hallmarks of “equities”.Footnote 151 Insofar as there is no certain frame of reference to determine the content and classification of “equities”, we cannot reliably apply bona fide purchase to the exclusion of the equitable priority rules.Footnote 152 Indeed, this approach has come in for trenchant criticism,Footnote 153 such that its utility has been doubted.Footnote 154 In the recent-most edition of Equity: Doctrines and Remedies the authors repeat a claim made in earlier editions that, “[t]o explain such an exception to the [‘first in time’ priority rule] in terms of a distinction between mere equities and equitable interests … smacks of circularity and the description of an effect as if it were a cause”.Footnote 155 It follows that Phillips did not manage to solve the ultimate problem raised by that dispute, so much as recast it in taxonomical terms; to paraphrase Lord Eldon, Lord Westbury “missed his object in the extent [to] which he meant to acquire it”.Footnote 156 A flavour of having identified a reductio ad absurdum in Lord Westbury's efforts underlies O'Sullivan's observation that:
[C]oncluding that bona fide purchase of an equitable interest is a defence to a prior equity also requires a narrow reading of Lord Westbury's general rule [outlined in Phillips] that the plea of bona fide purchase is inapplicable in determining priority between successive equitable interests in property, which are governed by the rules of equitable assignment and priority. That general rule must be read so as not to extend to “equities”. This is the orthodoxy today. It provides that the general rule only applies to “equitable interests”, “equities” are not equitable interests, and for this reason equities are outside the general rule. Subsequent cases have thus been concerned with difficult exercises in taxonomy, determining whether the plaintiff's claim is to be characterised as an “equitable interest” or an “equity”.Footnote 157
It is indeed true that the availability of bona fide purchase to those taking equitable interests remains contentious today.Footnote 158 It is also true that the uncertainty surrounding Phillips is in no small part attributable to Lord Westbury's use of infelicitous language; the term “equity” has always served as an inexact signifier for a number of distinct rules, interests and claims.Footnote 159 Even today, one can see instances of “equity” being used interchangeably with “equitable interest”.Footnote 160 It must therefore remain true that the exact delineation between bona fide purchase and the equitable priority rules remains uncertain.
A. Bona Fide Purchase and Equitable Priority: A Difference of Function
Though we may concede the substance of the criticism above, we should make sure we fully understand what Lord Westbury was seeking to achieve by the distinction drawn between “equities” and interests. The purpose of this section of the paper is to look beyond the language used in Phillips towards the substance of its reasoning, which reveals an underlying, conceptual logic to the decision. In Phillips, Lord Westbury could not reject the defendants’ invocation of bona fide purchase simply by relying on the citation of authority because, as we saw above, this did not provide a reliable touchstone by which to distinguish the title-clearing defence from the equitable priority rules. For this reason, Lord Westbury sought to explain the distinction in conceptual terms; bona fide purchase served a different function from that served by the equitable priority rules. In theory at least, a court would be hard-pressed to confuse the two rules in light of these distinct functions, just so long as it kept the distinction in mind when assessing the claimant's bill for relief. This is ultimately the approach Lord Westbury took in Phillips.
What were these distinct functions? The function of bona fide purchase was to enable the defendant to keep a right or advantage in specie that the claimant was seeking to take from him or her.Footnote 161 By contrast, the equitable priority rules dealt with a number of rights vested in a number of right-holders and sought to rank those rights in a notional queue. The place in the queue was determined by reference to two-factors: (1) the timing at which each right had vested in the right-holder; and (2) the conduct of each right-holder.Footnote 162 In short, had lawyers looked beyond the language used in Phillips towards this conceptual distinction, there would not necessarily have been the “difficult exercises in taxonomy” of the kind O'Sullivan rightly criticises.
The first task is to revisit the contemporary conceptual understanding of bona fide purchase in 1861. We shall then consider how Lord Westbury distinguished the title-clearing defence from the equitable priority rules in terms of their distinct functions. We will then relate this to Lord Westbury's understanding of equitable rescission to demonstrate how the third category of bona fide purchase corresponded to this difference in function.
B. Bona Fide Purchase in 1861
We saw that the availability of bona fide purchase was a far greater source of uncertainty in the late nineteenth-century than it is today. The main reason for this confusion was that the defence operated at the interstices of several distinct bodies of rules: (1) those rules concerning the split-jurisdictions of the common-law and Chancery courtsFootnote 163; (2) those rules concerning Chancery's pleading systemFootnote 164; and, of course (3) the law of property, itself complicated by two nomenclatures of property right.Footnote 165 It was therefore difficult to hone the defence down to a single, underlying rationale.Footnote 166
Despite this, a common theme underlay each of Lord Westbury's categories of bona fide purchase in Phillips; namely, that the plea, when successfully raised, would render the court inert vis-à-vis the right or advantage the defendant had acquired as a good faith purchaser.Footnote 167 By 1861, there was already a long tradition in the case law that rationalised the plea in exactly these terms; a court of equity would not take a right or advantage from a bona fide purchaser.Footnote 168 This is what was meant when it was said that, against equity's darling, the court had “no jurisdiction”.Footnote 169 It had no jurisdiction because a defendant who had given value in good faith had an equal claim upon the court's conscience as did the claimant.Footnote 170 For this reason, the claimant had “no equity”, no claim to relief against the defendant.Footnote 171 Yet jurisdiction was refused in pursuit of a functional end, that of allowing the defendant to keep a right or advantage free from adverse claims. Sir W.M. James L.J. neatly articulated this core function in 1874, a little over a year following Lord Westbury's death:
[I]t appears to me … a rule without exception, that from a purchaser for value without notice this Court takes away nothing which that purchaser has honestly acquired. If the purchaser has got possession of a piece of parchment, or of property, or of anything else which he thought he was getting honestly, this Court, in my opinion, has no right to interfere with him.Footnote 172
Of course, the breadth of Sir W.M. James L.J.'s formulation speaks to the fact that the defence, in terms of its core function, was strictly agnostic as to the kind of right the defendant had acquired; the necessity of acquiring a particular kind of right or advantage would be determined by the circumstances of the dispute, rather than by any kind of internal logic to the doctrine of bona fide purchase. So, in the context of an equitable priority dispute, the defendant would need to take a legal estate in order to invoke the tabula in naufragio doctrine.Footnote 173 By contrast, in equity's auxiliary jurisdiction, the defendant could plead the defence even though he or she had failed to acquire any right at allFootnote 174; the mere “possession of a piece of parchment” would suffice given the practical advantage to the defendant born of the split-jurisdictions of law and equity.
This “older” conception of the defence is therefore alternative to the more modern formulation that limits the defence to the singular function of clearing legal titles of prior equitable interests in primarily the context of a breach of trust.Footnote 175 The structure of the judgment in Phillips makes clear why this represents a “modern” formulation; in 1861 it was simply not possible, in light of the cases, to reduce the defence to a single fact-pattern in which a prior equitable interest faced a subsequent legal title. The modern, narrower conception of the defence was a later development, the description of which is beyond the scope of this paper.Footnote 176 What is clear from an analysis of Phillips within its historical context is that, at the time it was authored, the third category of bona fide purchase represented just one instance of a more broadly conceived doctrine.Footnote 177
C. Phillips: A Priority Dispute
In light of the analysis above, it is clear that bona fide purchase served a core function; it resolved a dispute in which both parties claimed a right or advantage in the defendant's hands by rendering the court inert vis-à-vis the right or advantage the defendant had acquired as a good faith purchaser, thereby enabling the defendant to keep that right or advantage free from adverse claims.Footnote 178 This kind of dispute was conceptually distinct from the one litigated in Phillips, in which the claimant and defendants were each asserting distinct equitable interests and the question was how those interests were to be ranked relative to one another. The hallmark of a priority dispute was therefore conceptual: it was a competition between two or more substantive equitable interests.Footnote 179
Viewed in this light, bona fide purchase simply could not perform its core function in Phillips and was not therefore available to plead. Two points make this clear. First, the claimant in Phillips was not seeking to take the defendants’ right away from them; he merely sought to vindicate his own prior equitable interest against the defendants’ distinct, subsequent interest.Footnote 180 The second issue concerned the nature of the right acquired by the defendants in Phillips. Lord Westbury's essential riposte to the defendants was this: if the function of the defence is to enable a defendant to keep a right in specie, then it cannot save the defendant from any latent defects or disadvantageous features that are innate to that right. As Lord Westbury noted, the claimant's equitable annuity had been “carved out” of the equitable estate long before it had been transferred to the defendants; all they had acquired was a cake from which a slice had already been taken.Footnote 181 As Lord Westbury observed:
The case, therefore, that I have to decide is the ordinary case of a person claiming under an innocent equitable conveyance that interest which existed in the grantor at the time when that conveyance was made … that interest was diminished by the estate that had been previously granted to the annuitant … there is no ground whatever for contending that the estate of the person taking under the subsequent marriage settlement is not to be treated by this Court, being an equitable estate, as subject to the antecedent annuity, just as effectually as if the annuity itself had been noticed and excepted out of the operation of the subsequent instrument. I have no difficulty, therefore, in holding that the plea of purchase for valuable consideration is upon principle not at all applicable to the case before me, even if I could take notice of it as having been rightly and regularly raised.Footnote 182
Lord Westbury is here explaining the functional disapplication of bona fide purchase in the context of a dispute between a number of distinct equitable proprietary rights. Such disputes were resolved using the equitable priority rules and this remains the case today.Footnote 183
D. Third Category of Bona Fide Purchase
In light of this fundamental difference in function between bona fide purchase and the equitable priority rules, we can better understand Lord Westbury's thinking behind the third category of bona fide purchase in Phillips. For two reasons, an “equity” to rescind did not trigger the application of the “first in time” priority rule but was instead subject to the title-clearing defence.
First, the indications are that Lord Westbury viewed equitable rescission as a court-administered remedy,Footnote 184 and therefore saw the “equity” to rescind as a procedural power to file a bill, commence suit and then seek the remedy of rescission.Footnote 185 We might recall His Lordship's description of the claimant in Eyre v Burmester as one who could “at any time during the life of Sadleir, by bill in equity have set aside the release, and obtained a reconveyance of the estate”.Footnote 186 Insofar as an “equity” was a procedural entitlement to commence suit, it could not “register” within the “first in time” rule the function of which was to resolve disputes between vested equitable property rights.Footnote 187 Though many scholars would today disagree with the characterisation of the mere equity as a procedural power, there nonetheless exists a consensus that, whatever its exact content, the “equity” is not a vested equitable interest and does not therefore register within the equitable priority rules.Footnote 188
Second, a claim to rescind is, in substance, a claim to take a right away from the defendant, assuming that the defendant acquired a right from the original transferee under the voidable transaction. The rescinding-claimant is entitled to either a transfer of the same right in the hands of the third-party purchaser, or the delivery-up and cancellation of that right.Footnote 189 This is a dispute in which bona fide purchase could discharge its core function, and so it should be resolved by reference to the defence. Indeed, it was an established rule at the time,Footnote 190 which has remained with us since,Footnote 191 that rights acquired by innocent third parties, without notice of some prior fraud or other vitiating factor, may effectively “bar” relief in specie by way of rescission,Footnote 192 or rectification.Footnote 193 Where an order of reconveyance would prejudice third-party rights, equitable rescission shall not necessarily be barred, but relief shall be designed in such a way as to protect the third-party purchaser.Footnote 194
In truth, the taxonomical distinction Lord Westbury drew between “equities” and interests in Phillips was only a convenient shorthand to illustrate what His Lordship viewed as a difference in function between the title-clearing defence and the equitable priority rules. This distinction underpins the ratio in Phillips v Phillips. Whether or not the third category of bona fide purchase is worth keeping today is a broader question beyond the scope of this paper. However, in approaching that question, our focus should be upon the reasoning in Phillips rather than the language through which that reasoning was expressed. After all, Lord Westbury was only making use of terms that were commonplace in his own time and which we have not managed to significantly improve upon since.
VI. Conclusion
Legal history has a unique contribution to make towards giving us a deeper understanding of “vestigial” doctrines: those legal rules that were developed within the conceptual-framework of a prior age in response to its challenges, but which are now used to address our challenges.Footnote 195 This paper has sought to demonstrate this truism in relation to the rule in Phillips v Phillips. In that judgment, Lord Westbury said what he meant and meant what he said: the bona fide purchaser of an equitable interest takes free of prior “equities”. Behind this language lay a conceptual distinction of function between the bona fide purchase defence and the equitable priority rules. From today's perspective, Phillips stands for a simple and commendable proposition: a court of equity shall neither rescind nor rectify a voidable transaction to the prejudice of a bona fide purchaser, whether that purchaser acquired a legal title or an equitable interest.Footnote 196 Until we change our minds about the good sense of this approach, Phillips shall remain integral, not only to our understanding of legal history, but also to our understanding of the rules we use today and the reasons why we use them.
