7. The Offside Goals Rule and Fraud on Creditors

Dr John MacLeod

I understand that, as a student, Professor Rennie was known to miss the occasional conveyancing class in order to play football. This siren call is not the only danger that the beautiful game has posed for Scots property law. It also gave us a name, and a dubious metaphor, for the so-called offside goals rule.

Few areas of Scots property law have attracted as much modern scholarly interest.1 One of the reasons why the rule might appear unworthy of the fuss is the simplicity with which the core case may be stated. The classic instance is double sale: Alfred concludes a contract for the sale of his field to Betty; before Betty has obtained her real right, Alfred sells it a second time to Cecil, who registers first. The offside goals rule says that, if Cecil was in bad faith, the transfer to him is voidable at Betty’s instance. Betty can also set aside a gratuitous transfer to Cecil even if he is in good faith.

There is broad consensus on the basic elements. A grant is voidable under the offside goals rule if:

(i) the granter was under a prior obligation to grant a real right to the avoiding party, which obligation gave rise to a concomitant obligation not to alienate or burden the property;

(ii) the grant was made in breach of the prior obligation;

(iii) the grantee knew of the obligation or the grant was not for value.2

If the rule can be briefly stated and there is agreement about its content, why are Scots property lawyers so concerned about it? One reason is that it bears on the discussion of the relationship between real and personal rights which was at the centre of Scots property law discourse at the turn of the 21st century. In particular, it threatens to undermine the clear distinction between real and personal rights established in Burnett’s Trustee v Grainger.3 The rule appears to run contrary to the maxim prior tempore potior iure est.4 The puzzle is to explain how a party with a real right can be vulnerable to a challenge brought by someone with a mere personal right.

A. Mala Fides, Personal Bar and the Publicity Principle

Although the topic was addressed during the foundational period in the seventeenth and eighteenth centuries,5 modern discussion begins with Rodger (Builders) Ltd v Fawdry6 which offers little consideration of the basis of the rule. Lord Jamieson, giving the leading judgment, was content to rely on three nineteenth-century cases where the rule had been applied and to observe that the purchaser was in bad faith.7

In the first of these, Marshall v Hynd,8 the judges’ primary concern was the level of knowledge needed to put the second purchaser in bad faith. If knowledge is to constitute bad faith, there must be some rule which explains why the party with the knowledge should have acted differently. This issue was addressed in the third case mentioned in Rodger (Builders), Stodart v Dalzell, where Lords Ormidale and Gifford suggested that the second purchaser’s knowledge of the prior right meant that he was not entitled to rely on the faith of the records regarding his seller’s right.9

These authorities make Lord Gifford’s characterisation of the rule as a species of personal bar in the second of the three cases, Petrie v Forsyth, understandable.10 On this model the first buyer has acquired a right, albeit not one which has been published. Under normal circumstances, that right could not be invoked against second buyer who had registered because the latter could invoke the faith of the records. However, the second buyer’s knowledge of the right means that he is barred from making this argument since he knew better. As Reid and Blackie point out, however, personal bar is difficult to maintain in this context because of the absence of inconsistent conduct by the second buyer.11

Even if the language of personal bar is eschewed, a rule which restricts reliance on the register to those who are in good faith is conceivable. Indeed such rules exist in the Land Registration (Scotland) Act 2012.12 Wortley makes tentative moves towards such an analysis with his suggestion that the basis of the offside goals rule might lie in an aspect of the publicity principle: “the publicity principle is not merely there to protect third parties: in certain circumstances, it can also be used to penalise them.”13

The difficulty with this approach is that the act of publicity (be it registration, intimation or delivery) is not merely a mechanism for making a transfer known. It is constitutive of the transfer. Until that act is completed, ownership remains with the seller and the first buyer’s right is merely personal. The first buyer has no proprietary interest of which third parties could have notice. This stands in contrast to the good faith requirements in the 2012 Act,14 which cover cases where the Land Register misstates the relevant real rights.

In that context, an argument based on the faith of the records or the publicity principle might have difficulty answering Lord Low’s objection: “Assuming that they knew of the obligation, they knew also that it did not affect the lands.”15 Like its correlative right, the seller’s duty is personal. The second buyer might argue that his knowledge of it was irrelevant because the obligation of which he knew did not bind him. Further, arguments about publicity or personal bar offer little in the way of an explanation for why a gratuitous transferee who was ignorant of the earlier transfer should be vulnerable.16

B. Mala Fides and the Transfer Agreement

Carey Miller suggests that the import of the second buyer’s bad faith can be explained, not by reference to the publicity principle but by invoking the principle of separation of contract and conveyance.17 This principle recognises transfer as a distinct juridical act requiring intention on the part of transferor and transferee. Carey Miller argues that the second buyer’s bad faith means he has a defective intention to acquire, which renders his right voidable.18

Carey Miller employs an unusual understanding of intention. Both seller and second buyer wish the transfer to take place and, on a conventional view of intention, that would be enough. At the time of the transfer their wills are directed to that end. The fact that they know it to be wrong does not affect this intention. A poacher has a sufficient animus acquirendi, although he knows that he is committing a crime.19 Further, the vices of consent, such as fraud and force and fear, operate for the protection of one of the parties to a transaction where his consent has been improperly obtained. What is being suggested here is something completely different: both parties give free and informed consent and it is a third party who needs the protection.

A second problem with Carey Miller’s analysis is a variant of the problem with the publicity principle argument. Even if bad faith can affect intention to acquire, some explanation of why the knowledge amounts to bad faith is needed. As noted above, knowledge only constitutes bad faith when coupled with a rule explaining why the knowledge should have made you act differently.

As for the gratuity case, Carey Miller addresses this in straightforward policy terms, suggesting that the reason is simply that “a party who fails to give value should not trump a competing party with an earlier right.”20 This approach has intuitive appeal. The law of transfer is primarily geared towards the needs of commerce and thus of onerous transferees. Donees are not worthy of this protection.

Once again, however, a little more seems necessary. Suppose Donna makes a written promise to David that she will convey a field to him. The next day, she concludes a contract with Betty for the sale of the same field. Foolishly, Betty pays up front. On the third day, Donna delivers the disposition to David who duly registers it. Betty clearly has a right against Donna for breach of contract but David is safe. The story would be different if Betty’s missives had been concluded on Day 1 and the promise to David made on Day 2. If the basic idea behind the vulnerability of donees under the offside goals rule is that they are less worthy of protection than onerous transferees, it is difficult to see why Betty should be worse off because the promise happened to come first. To say that David has the earlier right is to fall into the error which underlies the personal bar analysis: the idea that some kind of proto-property right is acquired before completion of the transfer of which the act of transfer merely gives notice. All David has on Day 1 is a personal right against Donna. Similarly, if the gratuity case is explained by lack of sympathy for donees, why can a promisee invoke the rule against later donee?21

C. Mala Fides and Fraud

The difficulties with the publicity principle and the transfer agreement as bases for the offside goals rule drive analysis back to an earlier approach. The nineteenth-century cases cited in Rodger (Builders) marked a shift in the analysis of the rule. Up to that point, it was thought to rest on fraud.

Seatoun v Copburnes,22 decided in 1549, is probably the first recorded case which can be understood in terms of the offside goals rule. Lady Seatoun sought to reduce an infeftment given to James Copburne by his father. She argued that, prior to that sasine, she and the priests and college of the Kirk of Seatoun had bought an annualrent23 of the lands from the father. Lady Seatoun alleged that infeftment on the annualrent had been completed, so she might have relied on her prior real right but she chose not to do so. Instead she suggested that “the said laird in manifest defraud of the said lady and preistis dolose infeodavit suum filium in suis terris, and sua, said scho [i.e. she], that that alienatioun in dolo et fraude (ut predicitur) facta de iure erat retractanda.” In other words, she sought reduction of the infeftment on the basis that it was granted in fraud of her right to the lands.

Fraud also played a key role in the first major scholarly discussion of the offside goals rule: Stair’s treatment of resolutive conditions in contracts of sale. A resolutive condition is a term which purports to make the property revert to the transferor in given circumstances. Stair’s view was that such conditions had no proprietary effect. The transferee merely had an obligation to reconvey if the condition occurred. This raised the question of the effect of the obligation on third parties who obtained the property from the transferee. Although the origin of the obligation to convey differs from double sale, the end result is the same: an alienation in breach of an obligation to grant a real right to someone else.

As with Seatoun v Copburnes, Stair analyses the situation in terms of fraud:24

…though there may be fraud in the acquirer, which raiseth an obligation of reparation to the party damnified by that delinquence, yet that is but personal; and another party acquiring bona fide or necessarily, and not partaking of that fraud, is in tuto. But certain knowledge, by intimation, citation, or the like, inducing malam fidem, whereby any prior disposition or assignation made to another party is certainly known, or at least interruption made in acquiring by arrestment or citation of the acquirer, such rights acquired, not being of necessity to satisfy prior engagements, are reducible ex capite fraudis, and the acquirer is partaker of the fraud of his author, who thereby becomes a granter of double rights; but this will not hinder legal diligence to proceed and be completed and become effectual, though the user thereof did certainly know of any inchoate or incomplete right of another.

Certain elements of the analysis are worthy of particular note: the idea that the primary wrong is done by the granter (referred to as the acquirer because of the context of a resolutive condition); that the successor is only vulnerable if the prior right is known of and that the basis of this is not his own fraud but participation in the granter’s fraud. As with his general analysis of fraud,25 Stair characterises the vulnerability of a transaction affected by fraud in terms of a personal right to reparation from the wrongdoer.

D. Is Fraud a Broad Enough Concept to Account for the Offside Goals Rule?

As Anderson and Reid show,26 the fraud analysis persisted until the nineteenth century. Indeed references to it can also be found in the later cases, existing alongside arguments based on publicity or personal bar. Thus, in Morrison v Sommerville, Lord Kinloch gives a classic fraud-based analysis:27

In granting a second right, the seller is guilty of fraud on the first purchaser. Against the seller himself the transactions would be clearly reducible. But, in taking the second right in the knowledge of the first, the second disponee becomes an accomplice in the fraud, and the transactions is reducible against both alike.

In Petrie v Forsyth, Lord Neaves proceeded on the basis that the second purchaser’s conduct was fraudulent.28 However, Lord Gifford took a different approach, distinguishing between fraud, mala fides and “mere knowledge.”29 He concluded that what was needed was knowledge sufficient to put the second purchaser under a duty to contact the first. Lord Gifford clearly considered this to fall short of fraud. On such a model it is difficult to see how fraud can form the basis for the doctrine.

A similar line of reasoning is articulated by Lord Drummond Young in Advice Centre for Mortgages:30

The theoretical basis for the foregoing principle is not discussed in any detail in the decided cases, perhaps because its practical application is very obvious, at least in simpler cases. The origins of the principle seem to lie in the concept of fraud in its older sense. This is not the modern sense, involving a false representation made knowingly, but rather consists of actings designed to defeat another person’s legal right. Nevertheless, the law has moved away from the concept of fraud. In Rodger Lord Jamieson said: “[F]raud in the sense of moral delinquency does not enter into the matter. It is sufficient if the intending purchaser fails to make the inquiry which he is bound to do. If he fails he is no longer in bona fide but in mala fide.” Thus implied or constructive knowledge, just as much as actual knowledge, will bring the principle into operation and render the second purchaser in mala fide.

The discomfort with fraud as a rationale is also evident in academic analysis: Kenneth Reid is careful to specify that “the original analysis based on ‘fraud’ remains correct, provided that ‘fraud’ is not confined to its narrow modern meaning.”31 Wortley goes further, seeming to regard the second purchaser’s liability in cases of mere knowledge of the prior right as being more than a fraud-based justification can support.32 Dot Reid views offside goals as part of the law of fraud, specifically of secondary fraud, but suggests that this is a survival of the older, broader view which was heavily dependent on the concept of inequality derived ultimately from scholastic thinking. This leaves the offside goals rule in the law of obligations but outside the established categories of enrichment or delict.33

The doubt stems from the interaction of two developments. First, there is the sense that while Scots law took a broad view of fraud in the early-modern period, later developments saw it narrow considerably. This process, particularly the influence of Derry v Peek,34 is thought to have limited fraud to deceit.35 Secondly, there appears to be a relaxation in the level of knowledge required for offside goals in some of the dicta in the nineteenth-century cases. This broadened the scope of the rule and can appear to move it away from a category of intentional wrongdoing.

Is it possible to address these concerns and thus to continue to rely on fraud as a basis which can guide future development?

(1) Fraud on creditors rather than fraud as deceit

In response to the objection that the meaning of fraud has narrowed, reference may be made to a species of fraud which is recognised by the modern law but which does not involve deception: fraud on creditors. It is worthy of note that mere knowledge of what is going on is sufficient to render the debtor’s counterparty a participant in the fraud in that context.

The best known example of fraud on creditors is the transfer or burdening of assets by an insolvent debtor. The classic examples are well-known. A debtor recognises that he is irrecoverably insolvent. Knowing that his assets will be sold to pay his debts, he decides that he would rather see them go to his friends, so he gives them away. In some cases the transfer might be intended to allow the debtor continued use of the property, as where a businessman in embarrassed circumstances transfers the family home to his wife. Whatever the purpose, the result is the same: a pool of assets which was already insufficient to meet the debtor’s obligations is further diminished. Creditors’ interests are thus prejudiced. Both common law and statute allow for the reversal of such transfers or grants at the instance of creditors or the insolvency official. These grants are usually gratuitous but an onerous grantee who colludes with the debtor in his attempt to frustrate his creditors is also liable to have his grant reduced.36

It is clear that the basis of this rule at common law is that the transactions are fraudulent.37 This rule is very widely recognised in both the Common Law and Civilian tradition.38 In the latter it is commonly referred to as the actio Pauliana, a term which betrays the rule’s origins in Roman law.

The debtor may have contracted the debts in good faith with the full intention of paying them. In such a case, the creditors have not been deceived into giving credit but they are nonetheless said to be defrauded. As with the offside goals rule, this provokes a degree of discomfort in the modern sources, leading McBryde to suggest that fraud in this context is anomalous and to caution against use of authorities on fraud in the general sense.39

The striking thing is that the anomalous fraud looks very similar to the offside goals rule. Both rules involve actions by a debtor which render him incapable of fulfilling his obligation and thus frustrate the creditor’s hopes of recovery. As with the offside goals rule, the grantee may find himself liable either because he knew what the debtor was doing or because his grant was gratuitous. Furthermore, as with Stair’s account of the offside goals situation, the primary fraud is that of the debtor while the grantee is liable as a participant in the debtor’s fraud.40

Anderson notes the parallel between the offside goals rule and the actio Pauliana, but points to two differences: in the actio Pauliana having given good consideration is usually a defence and the relevant mala fides is knowledge of insolvency rather than knowledge of a prior right.41 However, these differences reflect a different context rather than a fundamental conceptual division. The reason that payment is usually a good defence to the actio Pauliana is that such payment renders the transaction neutral in its effect on the patrimony. There is no prejudice to ordinary creditors. It makes no difference to them whether the debtor has a piece of machinery worth £5,000 or £5,000 in his bank account. Both are assets which are available to them for the satisfaction of their rights. Things are different in the offside goals situation because what matters for the creditor is not the value of the patrimony as a whole but the presence in it of the particular asset to which he is entitled.

This line of thought leads to an explanation of why the relevant mala fides is knowledge of the insolvency in an actio Pauliana situation and knowledge of the competing right in an offside goals situation. Knowledge that someone is insolvent implies knowledge of personal rights against his patrimony: if you know someone is insolvent you know that he has creditors whom he cannot pay. Specific knowledge of the creditors’ rights is not necessary because the counterparty knows enough to understand that the transaction will frustrate the creditors’ hopes of recovery. Conversely, if a buyer knows that someone else has a personal right to a particular asset, the general solvency of the seller is not relevant. Even if the seller is generally solvent, the competitor will still be frustrated.

The actio Pauliana and the offside goals rule can both be seen as protecting creditors whose debtors act to frustrate their hopes of satisfaction, the difference in the detail of the two rules results from differences in context and thus in the nature of the protection necessary.

Insolvency fraud is not the only instance of fraud on creditors recognised by Scots law, although the other instance is less obvious at first sight. A creditor who intends to do diligence can use an inhibition to render the debtor’s heritable property litigious.42 As with the actio Pauliana, the concern is that the creditor’s recourse (in this case by means of diligence) against the debtor’s assets will be frustrated by voluntary acts of the debtor. The point is made most clearly by reference to the historic terms of letters of inhibition. Prior to their abolition,43 letters of inhibition were the means by which the Court of Session, acting in the name of king or queen sanctioned the inhibition of the debtor. The letters instructed messengers at arms to make two prohibitions. First, they were to “inhibit and discharge” the debtor, prohibiting any dealing with his property whether heritable or moveable and any act pursuant to which diligence might be done against his assets. Secondly, “all our lieges of this realm, and all others whom it effeirs” were to be inhibited and discharged from concluding any of the prohibited transactions with the debtor. The former prohibition required to be by personal service on the debtor, the latter by proclamation at the market cross. The reason for this drastic action was also narrated in the letters: namely that the king is informed that the debtor intends to diminish his estate “in defraud and prejudice of the complainer.”44

Again, the fraud in this case is not deception. The problem facing the creditor is assets leaving the debtor’s patrimony meaning that there is not enough there to satisfy the former’s right. Letters of inhibition are no longer issued but the new schedule of inhibition reflects the old thinking. To take the example of an inhibition by a creditor suing to enforce a debt in the Court of Session:45

…In Her Majesty’s name and authority, I [name], Messenger at Arms, by virtue of [document which warrants the inhibition] inhibit you from selling, disposing of, burdening or otherwise affecting all land and heritable property in which you have an interest to the prejudice of [the inhibitor].

Again, inhibition has its own special characteristics, notably the absence of any need to prove bad faith on the part of those dealing with the debtor but that is because registration of the inhibition operates to put everyone on notice that the debtor has been so restricted.

Another speciality of inhibition illustrates the fact that inhibition operates to protect satisfaction of a personal right. A general creditor’s inhibition covers the heritable property of the debtor because any of it could be subject to an adjudication for enforcement of the debt. Where, however, the creditor inhibits with a view to enforcing a personal right to a particular plot, the effect of the inhibition is restricted to that asset.46 The general state of the patrimony is irrelevant to the creditor, provided that his access to that plot is secured.

Fraud in the sense of deception and fraud on creditors may well have been part of a broader concept of fraud which has since fallen away but both survive in the modern law. Therefore, a narrowing of the concept of fraud is not a reason to doubt its appropriateness as a grounding concept for the offside goals rule.

Mala fides without knowledge

The second problem identified by the modern accounts relates to the knowledge requirement. Mala fides can be fixed even in cases where the second purchaser is unaware of the prior right, provided that he knows enough to put him on his inquiry and then fails to properly investigate. Thus the rule can apply where a naïve second purchaser honestly thought that there was no problem. That is the basis for Lord Jamieson’s observation that “fraud in the sense of moral delinquency does not enter into the matter.”47

The courts have been somewhat evasive about the precise circumstances which will raise the duty of inquiry and what the content of the duty is.48 This is regrettable because it makes life difficult for potential purchasers, but the basic idea is clear enough: where there is a duty of inquiry on a purchaser and he fails to make that inquiry, he cannot rely on his ignorance of a fact of which he would have known had he fulfilled the duty. You are treated as knowing what you should have known.

Lord Drummond Young was therefore correct to characterise circumstances where the duty of inquiry is neglected as cases of “implied or constructive knowledge.”49 Again, this reflects analysis found in other instances of fraud on creditors: the result of publication of an inhibition is that everyone is deemed to know of it. Where there is constructive knowledge of a prior right, the grantee is deemed to have that knowledge and the analysis therefore proceeds on the basis that he does know.

Where Lord Drummond Young went astray was to conclude that this amounted to a move away from the concept of fraud. The fraud is still there: the seller knows of the prior right and sells anyway. Mala fides is not watered-down fraud; mala fides is knowing that the fraud is happening. Such a view is consistent with the standard understanding of bona fides in property transactions: ignorance of another’s right.50

It is worth bearing in mind that the offside goals rule is not the only circumstance where failure to come up to an objective standard of reasonable inquiry can leave a naïve counterparty liable on the basis of complicity in fraud. A solicitor’s naïve trust in his client was held sufficient to render him liable as an accessory to (conventional) fraud by deception in Frank Houlgate Investment Co Ltd v Biggart Baillie.51

Why is the faith bad?

If fraud is to provide a convincing rationale for the offside goals rule some explanation is needed of why the third party must take account of a personal duty owed by someone else.

It is not quite sufficient to point to the accessory nature of the liability, however. In criminal law, such an assertion suffices because criminal law duties typically bind everyone and therefore the conduct in question is wrong for both principal and accessory. The same can be said of inducing a payment by deception.52 Everyone owes everyone else a duty not to commit such fraud. So, where Alfred induces Brenda to pay him by deception using forged documents and Cecil helps to prepare the documents, knowing what they are for, both are liable. Cecil was obliged not to deceive Brenda just as much as Alfred.

In offside goals, however, the position is different. The seller’s conduct is only wrong because of a particular duty that he and only he owes to the first purchaser. Until the first contract was concluded, a sale to the second purchaser was perfectly lawful. The duty not to sell flows from that contract to which the second purchaser was not a party. The second purchaser might argue that, although he knew that the seller was behaving wrongfully, this fraud arose from the personal relationship between the seller and the first buyer and was therefore none of his business.

This problem is not unique to the offside goals rule. It is also raised by fraud by insolvent debtors but it is felt more sharply in relation to offside goals, perhaps because the actio Pauliana is so ubiquitous, and perhaps because the requirement of insolvency is thought to keep it within reasonable bounds.

Dot Reid explains the accessory’s liability by reference to the moral sense of Stair and Aquinas and the latter’s broad notion of inequality.53 That, however, raises the question of how this moral sense might be conceptualised as a duty with legal consequences.

The rules on fraud on creditors, whether they arise in the context of offside goals, insolvency or inhibition, presuppose a limited duty of non-interference with other people’s personal rights. While a personal right is only enforceable against the debtor, it is not a matter of complete indifference to third parties. They have a duty not to facilitate breaches of the relevant obligation. However, since personal rights are invisible, facilitation only renders the facilitator liable in circumstances when he knew or ought to have known of the right and that the conduct in question would breach it.

Further evidence of such a duty can be found in the delict of inducing breach of contract. The five characteristics or essential elements of that delict were set out by Lord Hodge in Global Resources Group Ltd v Mackay:54

(i) breach of contract;

(ii) knowledge on the part of the inducing party that this will occur;

(iii) breach which is either a means to an end sought by the inducing party or an end in itself;

(iv) inducement in the form of persuasion, encouragement or assistance;

(v) absence of lawful justification.

The parallels with the requirements for the offside goals rule are close but not exact.55 Some differences are not surprising given the differing origins. Nonetheless, the parallels between the two rules are striking: in the core offside goals case, the second purchaser persuades the seller to sell when the latter was already contracted to transfer the property to another; in the foundational authority on inducing breach of contract a theatre owner persuaded a singer to appear in his theatre when she was contractually bound to sing in another.56

Both rules are part of modern Scots law and both point towards recognition of an obligation to take account of other people’s personal rights. Both do so on the basis of accessory liability.57 Absent an obligation not to participate in breach of a personal right, it is difficult to see how inducing breach of contract or participating in a fraud on creditors could be considered wrongful.

Of course, that answer raises its own question: if third parties owe the holder of a personal right a duty not knowingly to participate in or encourage the breach of that right, why is the third party’s liability accessory? The answer lies in the trigger for the liability. Liability depends on breach by the debtor. Until the debtor defaults on his obligation, the third party is not liable. So a third party who tried, unsuccessfully, to persuade a seller to sell to another incur no liability.

A duty of non-interference sits well with the idea that personal rights are property which is owned in essentially the same way as corporeal property.58 It can then be seen as equivalent to the duties of non-interference which protect corporeal moveables or land. Of course, the content of the duty is not absolute but neither is the duty not to interfere with corporeal property: a landowner, for example, must tolerate access taken under Part 1 of the Land Reform (Scotland) Act 2003, and the law of nuisance does not give a remedy against every use of neighbouring property which has implications for the enjoyment of his own; likewise a bona fide possessor of a corporeal moveable belonging to another does no wrong.

Admittedly, the duty of non-interference is not the same as the duty of non-interference with corporeal property, but that is because the nature of the property being protected is different. And in any event, the level of protection against interference by third parties is not uniform between the different types of corporeal property. There is no right to roam over corporeal moveables.

(2) The scope of the offside goals rule

Personal rights to real rights

Traditionally, the offside goals rule was said to protect only “rights capable of being made real”59 or, more precisely, “personal rights to real rights.” This limitation to the rule has been doubted in light of Trade Development Bank v Warriner & Mason (Scotland) Ltd.60 In that case, a condition against leasing in a standard security was given effect against a tenant on the basis of the tenant’s bad faith vis-à-vis the prohibition. This led Kenneth Reid to suggest that the personal-right-to-a-real-right requirement had fallen away and that the scope of the rule was instead controlled by the requirement that the granter was in breach of an antecedent obligation in making the grant.61

As Webster has pointed out,62 framing the rule’s application in these terms is difficult to reconcile with the earlier decision of the Inner House in Wallace v Simmers.63 There the court declined to apply the rule to protect a licensee against an action for ejection by a third party purchaser on the basis that this was not a personal right to a real right. Sale by one who has granted an irrevocable licence is a breach of an antecedent obligation (since it renders the licensor unable to fulfil his obligation), but Wallace means that the rule will not apply even if the third party is in bad faith.

The view that not every grant in breach of a prior obligation is challengeable as an offside goal is supported by recent authority.64 In Gibson v Royal Bank of Scotland Plc, however, Lord Emslie expressed some doubts about whether the “personal right to a real right” test was appropriately expressed.65 Nonetheless, his alternative formulation: that the right be capable of “affecting the records” seems to come to much the same thing for heritable property. The records are only affected in any meaningful way by transfer, extinction or grant of a real right.

Lord Emslie’s formulation has the disadvantage of not being apposite to cover moveable property. On the other hand it usefully raises the question of the holder of a real right who is contractually bound to grant a discharge transferring that right before the discharge is granted. For instance, Dominic may own a plot which has the benefit of a right of way over Serena’s land. She pays him for a discharge because she wants to develop the land. Before the discharge is granted, Dominic gifts the plot to Gary, who refuses to grant the discharge. Should Serena be able to invoke the offside goals rule? On Lord Emslie’s formulation, she can. On the traditional model, the picture is less clear but protecting her seems to be the correct result. Had Dominic contracted to grant a servitude to her, Serena would have been able to rely on it and there is no obvious reason why one type of transaction with a servitude should be favoured over another.

Therefore, the requirement might be better rephrased as a personal right to the grant, transfer, variation or discharge of a real right. This is rather cumbersome. The basic point expressed by the “personal-right-to-real-right” formulation appears to be widely accepted and the phrase remains a useful (if slightly imprecise) handle for the concept. The question remains, however, of how this idea sits with the rationale for the offside goals rule presented here.

Personal rights to subordinate real rights

One implication of the suggestion that the offside goals rule protects personal rights to the grant, transfer or discharge of real rights is that the rule extends beyond double sale. Someone with a personal right to the grant of a servitude or a lease should be able to invoke the rule too.66 So, if Bert contracts to grant a right of way to Sally but transfers the property to Ernie before Sally is able to register the grant, Sally can invoke the offside goals rule against Ernie if he was in bad faith or the transfer was gratuitous.

Subordinate real rights present difficulties in terms of remedies. If, the holder of the prior personal right hears of the wrongful grant before it is completed, he may be able to obtain an interdict against completion.67 What of the case where the prior rightholder only discovers the grant after the fact? Where the first grantee was entitled to transfer of the asset, there is no difficulty in returning the property to the seller. That is only a short term step, after which it will pass to the first grantee. Where, on the other hand, the first grantee is merely entitled to a subordinate right, setting a transfer aside seems to go too far. If the first grantee is entitled to a servitude, all he needs is an opportunity to complete his real right. He has no interest in the seller being the owner instead of the second buyer.

The South African solution is to allow the personal right to be enforced directly against the successor.68 This result has been explained in terms of a broad, equitable approach.69 It seems to come close to collapsing the distinction between real and personal rights and may explain the tendency in South Africa to suggest that the doctrine of notice (their equivalent of the offside goals rule) affords “limited real effect” to personal rights.70 Such an approach is not particularly attractive for Scots law. How then can the problem of the offside goal against a right to a servitude be solved?

One answer is suggested by reflecting on the fact that reduction of a deed granted in breach of inhibition is ad hunc effectum. Everyone also knows that reduction ad hunc effectum means that only the inhibitor is entitled to treat the reduced deed as null. Familiarity with the rule and lack of familiarity with Latin are apt to mask how strange this is. The words ad hunc effectum simply mean “to this effect.” Why should those words have come to signify that the reduction only benefits the inhibitor?

To answer this question, we need to make brief mention of seventeenth-century decisions concerning fraud on creditors by an insolvent debtor. In many of those cases, reduction was granted but the Lords specified the effect of reduction. In some cases this was to allow the reducing creditor to rank pari passu with other creditors;71 in others, the reduction only benefited certain classes of creditor.72 The particular scope was determined by what was necessary to reverse the prejudice caused by the debtor’s fraudulent actions and the rationale is fairly clear. To go further would be to go beyond the purpose of the rule: which is to secure creditors against the debtor’s attempts to frustrate their claims. The limitation was typically introduced by the phrase “to the effect that” or some variation thereon.

Turning back to inhibitions, the import of the phrase ad hunc effectum is readily explicable. The prohibition on dealing was imposed to protect the inhibiting creditor and no one else. Therefore, to allow the reduction to have effect in relation to anyone else would go beyond the purpose of the rule. We can surmise that there was an initial period when the words ad hunc effectum merely introduced the statement of the reduction’s operation and that later the specification was dropped as the Latin tag became detached from its meaning.

What this shows us is that limitation of the effect of reductions is not limited to inhibitions, which raises the possibility of applying it in the third class of fraud on creditors: offside goals.

Reduction of deeds granted in fraud of creditors is about putting assets back in a patrimony so that creditors can obtain rights in them. This is obviously the case with inhibition, or fraud by an insolvent debtor, but it is also the case in a classic double sale of land. Reduction is not an end in itself. Rather, it puts the fraudulent granter in a position to perform by granting a real right affecting the asset. Alternatively, it allows the creditors to get the court to make the grant for the debtor by means of diligence. This endgame is what justifies the reduction.

Where reduction is ad hunc effectum, its effect is specified so it goes no further than necessary to secure the protected interest. Thus reduction ex capite inhibitionis merely operates to render an adjudication against the former owner competent. That being achieved, it has no further value.

In some cases, the practical distinction between ad hunc effectum and catholic reduction is a minor one: if a transfer to Billy is reduced to allow Dan to register his disposition, Dan’s registration will deprive Billy of any right that he has. However, it makes a big difference where an offside goal has been scored and there is a personal right to a servitude. The reduction would be ad hunc effectum to enable a deed of servitude granted by the seller to be registered and constituted a real right, but it would go no further. For all other purposes Billy would remain owner.

Of course, the net result of this approach is very similar to the South African rule. A transferee who was faced with a valid offside goals challenge in these circumstances could save everyone a lot of time and money simply by agreeing to grant the relevant subordinate real right. In doing so, he would be in no worse a position than if reduction ad hunc effectum had been obtained and the grant had been made from his author. The courts might even be justified in allowing the procedure to be short-circuited and compelling the transferee to make such a grant. Nonetheless, for the sake of a proper understanding of the relationship between real and personal rights, it is important to grasp why such a short cut might be permitted.

Does the fraud-on-creditors analysis prove too much?

The fraud-on-creditors analysis can account for one implication of the view that the offside goals rule is a mechanism for protecting personal rights to real rights rather than being restricted to the case of double sale. However, it appears to struggle with a more fundamental aspect. If the basis of the offside goals rule is fraud on creditors and some general duty not to participate in the breach of personal rights owed to others, why should it be restricted to creditors holding a particular class of personal rights? After all, any kind of creditor can challenge a fraudulent grant by an insolvent debtor or protect his right with an inhibition. Why then, should the offside goals rule be restricted to a particular class of personal right?

The first point to note is that the offside goals rule is not the only mechanism which gives external effect to personal rights. Scots law also recognises that inducing breach of contract and the personal-right-to-a-real-right restriction do not apply to it. Therefore, the fact that a right is not a personal right to a real right does not necessarily mean that the third party is safe. Rather, it is likely to mean that he is liable in damages but safe from reduction of the transfer (as there is no offside goal). So the consequences of the personal-right-to-a-real-right restriction are not as sharp as first appears.

This argument depends on the mental element of inducing breach of contract being substantially the same as that for offside goals. This is broadly the case: the test for the mental element of inducing breach of contract is likely to be met in most bad-faith offside goals cases. If the second purchaser knows of the prior right, then breach of its correlative obligation is a necessary means to the end sought by the second purchaser: obtaining the property for himself.

The difficulty arises in those cases where the second purchaser is put on notice but has something which falls short of clear and certain knowledge of the prior right. This is a divergence between inducing breach of contract and offside goals. However, it is not as big a gap as may appear at first. In OBG v Allan, Lord Hoffmann made it clear that wilful blindness, where someone decides not to inquire for fear of what they might find, was as good as knowledge.73 That is sufficient to cover a lot of the offside goals cases and a reining in of the mental element to match that for inducing breach of contract would be desirable since the present approach creates too much uncertainty for potential purchasers.74

Even under the present law, there will be few cases where the mental element for the offside goals rule is fulfilled but that for inducing breach of contract is not. Where both are fulfilled, the restriction of the offside goals rule to personal rights to real rights affects which remedies are available rather than whether any remedy is available.

This brings the analysis back to the nature of the remedy under the offside goals rule. As suggested above, avoidance for fraud on creditors is aimed at putting an asset back in a patrimony so that a creditor can obtain a real right in it. It operates ad hunc effectum and goes no further. It gives the fraudulent transferor no right to possess the property.

That, in turn, provides a rationale for the result in Wallace v Simmers.75 Miss Simmers had a licence (a personal right) against her brother which entitled her to occupy a house on his property. He sold the property in breach of that licence. Suppose that she had obtained a reduction of the transfer from her brother to the buyer. What would the effect of that reduction have been? Her brother had no obligation to grant her any real right and, since reduction would not have given him any right to possess the property, he would not be in a position to secure her possession and thus to fulfil his obligation under the licence. The hunc in ad hunc effectum in this case would have no content. Therefore the reduction would have been pointless.

Restricting offside goals to personal rights to the grant of real rights is therefore consistent with the fraud rationale because it reflects the nature of avoidance for fraud on creditors.

(3) Gratuitous acquirers

An analysis based on the wrongful nature of the second purchaser’s conduct faces obvious challenges in dealing with the case of gratuitous acquisition.76 Yet recognition that the seller’s conduct amounts to fraud means that the “no profit from fraud” rule and the law of unjustified enrichment can be invoked to explain the vulnerability.77 This rule presents its own challenges because of the indirect nature of the enrichment. However, this exception to the normal rule against recovering indirect enrichment can be explained as an extension of the fraud rule: had the donee known what was being done, he would have been bound to refuse the property. That being the case, it might be argued that he would act wrongfully in seeking to hold onto the property when he finds out the facts.78 The voidability of the grant enables the party who would be so-wronged to prevent this wrong from being done. Therefore, an obligation to reverse the enrichment is justified although the enrichment is indirect.

Of course, an onerous transferee in good faith may also discover later that he was an unwitting accomplice in the seller’s wrong, but in such a case the balance of policy is a little different. Such a transferee is not seeking to retain a pure enrichment but rather the benefit of a lawful bargain. Were it to be forfeited, he would be left with a claim for money and so exposed to the risk of the seller’s insolvency. Given the personal rights do not rank according to the rule prior tempore potior iure, there is no obvious reason why that burden should be shifted from the first buyer to the second when both were duped by the seller.

This analysis draws on the point made by Carey Miller regarding the relative lack of favour which the law shows to donees, but it gives a reason for allowing a donee whose personal right predates a right under an onerous contract to keep the property if he got his real right first. In that case, the donee was not an unwitting accomplice in any fraud because his author was perfectly entitled to make the promise at the time when he made it.

E. Implications of Fraud on Creditors as a Rationale

On the analysis suggested above, avoidance of the transfer gives effect to the first creditor’s delictual right to reparation against a second purchaser who acquired in bad faith. It does that by putting the second purchaser in the position he would have been in had the wrongful act not taken place. The voidability of gratuitous grants is based on an analogous rule in the law of enrichment, which can be viewed as an extension of the fraud rule. One advantage of this view is that it allows the offside goals rule to be set alongside the other instances of fraud on creditors. Once that is established, they can offer guidance on some of the contested issues surrounding the offside goals rule.

The implications for the relationship between offside goals and subordinate real rights have already been discussed but the fraud-on-creditors analysis also casts light on another point of contention: the time at which the grantee must be put in bad faith for the offside goals rule to apply. It was suggested obiter in Rodger (Builders) that a buyer who was in good faith when missives were concluded but who discovered the prior right before registration of the disposition would be vulnerable.79 This view was followed by Lord Eassie in Alex Brewster & Sons v Caughey,80 whose decision was, in turn, endorsed by Lord Rodger in Burnett’s Trustee v Grainger.81 Lord Rodger took pains to explain why the position of the trustee in sequestration was distinguishable from that of a second buyer in an offside goals case. That was necessary because of his view that a second buyer who hears of a prior right must stand aside for the first purchaser whereas there is no such obligation on the trustee.

Despite its high authority this seems to be wrong in principle and has rightly been subject to academic criticism.82 A clue as to why it is wrong can be found in the extract from Stair which Lord Rodger gave to distinguish between the position of the trustee or the creditor doing diligence and the second purchaser:

But certain knowledge, by intimation, citation, or the like, inducing malam fidem, whereby any prior disposition or assignation made to another party is certainly known, or at least interruption made in acquiring by arrestment or citation of the acquirer, such rights acquired, not being of necessity to satisfy prior engagements, are reducible ex capite fraudis, and the acquirer is partaker of the fraud of his author, who thereby becomes a granter of double rights.83

While the general rule is that a bad faith acquirer will be vulnerable as a partaker in his author’s fraud, the rule does not apply to those who acquire “of necessity to satisfy prior engagements.” As Lord Rodger rightly observed, the trustee in sequestration and creditors doing diligence may readily be considered to fall into this class.

However, Lord Rodger neglects the fact that, once a purchaser has concluded his contract with the seller, he too is a creditor84 and takes “of necessity” because, like other creditors, taking an asset is the only way that he can ensure that his right is fulfilled. Indeed, it might be argued that the necessity affecting a purchaser is more pressing than that affecting a creditor who is owed money. It makes no difference to the latter which of the debtor’s assets is sold provided that it raises sufficient funds to pay the debt. A purchaser’s right, on the other hand, can only be satisfied by transfer of the asset he contracted to buy.

The point becomes clearer after reflection on other cases for fraud on creditors in the context of insolvency and of inhibition. It is no fraud to accept what you are owed and that is all that a buyer who registers with supervening knowledge of a prior contract does. There is an unavoidable conflict of rights and, in such a situation, each person is entitled to look to his own interests. The purchaser who knows of the prior contract before he concludes his own contract is in a different position because he can avoid the conflict of rights by not agreeing to buy the property.

F. Summary

The analysis in this chapter has suggested that the offside goals rule is best understood as an instance of the law’s response to fraud on creditors. Avoidance is natural restitution, giving the defrauded creditor reparation for the wrong. Like the other instances of fraud on creditors, grantees may be liable as participants in the fraud (where they are in bad faith) or on the basis of an enrichment rule which prevents the completion of an incomplete dolus (where the grant is gratuitous).

Categorisation of the rule as an instance of fraud on creditors suggests that avoidance on the basis of the offside goals rule is ad hunc effectum, with the scope of the reversal being defined by what is necessary to allow the defrauded creditor satisfaction by obtaining a real right in the relevant property. This factor explains both how the offside goals rule can protect a personal right to a subordinate real right and why the rule is limited to personal rights to real rights. The fraud-on-creditors rationale also implies that a creditor who was in good faith when he acquired his personal right is entitled to pursue satisfaction of that right even if he discovers a conflicting personal right before he gets his real right.

Painful though it is for an academic to admit it, skipping those conveyancing classes does not appear to have done any harm to Professor Rennie’s grasp of Scots property law. The Scots lawyer can handle a little football and, it appears, Scots law can handle the offside goals rule too.

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