Chapter 15: Equitable Remedies and Tracing Flashcards
The nature of equitable remedies
In this chapter and the chapter on ‘Liability of strangers’, we consider some of the key claims that
may be made following a breach of trust or fiduciary duty, including claims against third parties.
Before doing so, it is worth briefly exploring the nature of equitable remedies.
Available where common law damages are not sufficient
Broadly, equitable remedies are available in circumstances where common law damages
would not be adequate. This includes situations where the claimant is seeking to assert an
equitable interest (most obviously, a right under a trust) and cases where common law damages
would not be an adequate remedy for infringement of a common law right. Examples of the latter
include specific performance of contracts, injunctions and other court orders such as search
orders and freezing orders
Discretionary in nature
Equitable remedies are discretionary in nature, as we saw when considering the remedies
available in respect of a proprietary estoppel claim. However, case law has given rise to a series of
recognised principles regarding the award of equitable remedies.
Personal remedies
Personal remedies include monetary remedies such as equitable compensation (awarded in cases where a breach gives rise to loss) and an account of profits (awarded where a wrongdoer makes a profit). As we saw in the chapter on ‘Liability of trustees’, equitable compensation may be
awarded where a breach of trust or fiduciary duty results in a loss to the trust fund, while an account of profits will be more appropriate if the wrongdoer has personally made a profit.
Proprietary Remedies
Proprietary remedies involve awarding the claimant a proprietary right. Again, we saw an example
of this in the chapter on ‘The fiduciary relationship’ where we learned that a breach of the noprofit rule gives the claimant a choice between an account of profits and claiming a constructive
trust over the profit.
Option to claim a constructive trust
The option to claim a constructive trust is useful because it gives the claimant the ability to utilise
the following and tracing rules, identifying what the profit has been spent on. These rules can also
be used in cases where trustees have misapplied trust funds. They allow the claimant to trace into
a series of substitute assets and assert a proprietary right over the final proceed
Benefits of proprietary claims
The remedy sought at the end of this process might be for a security interest or a beneficial interest under a trust. Both types of claim ensure that the rights of the beneficiaries are ringfenced against the insolvency of the trustee. Claims for beneficial ownership of the asset also enable the beneficiaries to capture the benefit of any increases in value.
Identify the asset
So the ability to make a proprietary claim can be very useful. In order to do so, however, it will be
necessary to identify an asset which represents the proceeds of the breach. In the remainder of
this chapter, we consider the following, tracing and claiming rules.
Introduction to following, tracing and claiming
Options when trustees misapply funds
When a trustee misapplies trust property, the beneficiaries have a number of potential options
available to them. Broadly, they may be able to:
(a) Sue the trustee for breach of trust.
(b) Sue a third party who has assisted the breach of trust.
(c) Make a claim against the misapplied property or its traceable proceeds.
(d) Sue a third party who knowingly received the traceable proceeds of the breach.
In the remainder of this chapter we consider the following and tracing processes, and the proprietary claims that may be made at the end of that process.
Equitable proprietary claims
It can be very valuable to establish an equitable proprietary claim against property or its traceable proceeds.
A proprietary claim has three principal advantages:
(a) It is not affected by the defendant’s bankruptcy or insolvency.
(b) It enables beneficiaries to capture increases in the value of traceable proceeds.
(c) It does not depend on fault: it can be maintained against the defaulting trustee and against
innocent recipients of the trust property or its traceable proceeds
Locate misapplied property and identify assets that represent it
Following, tracing and claiming underpin equitable proprietary claims. The function of the
following and tracing rules is to locate misapplied trust property and to identify assets which
represent it.
Following
Following is the process of ‘following the same asset as it moves from hand to hand’
(Foskett). It is the process for locating misapplied trust property. Thus, if T misapplies £1,000
(cash) of the trust fund and gifts it to X, and X gifts it to Y, the beneficiaries can follow the
£1,000 from T to X and then to Y
Tracing
Tracing is the process of ‘identifying a new asset as the substitute for the old’ (Foskett). Generally, one asset is the traceable proceed of another if there is ‘a series of direct
substitutions’ between them (Relfo Ltd (in liquidation) v Varsani [2014] EWCA Civ 360).
Claiming
Claiming is the assertion of a personal or proprietary right in relation to misapplied
trust property or its traceable proceeds (Foskett).
Example: Following and tracing
A trustee misapplies £1,000 (cash) of a trust fund and gifts it to X.
X uses the cash to buy a painting.
The beneficiaries can follow the £1,000 from the trustee to X and then trace it into the painting
because X exchanged the £1,000 for the painting.
The painting is the substitute for the £1,000.
A claimant can use the equitable following, tracing and claiming rules if two conditions are
satisfied (Re Diplock [1948] Ch 465):
(a) The claimant had a ‘right of property recognised by equity’ in the asset which they seek to
follow and/or trace.
(b) The asset was held by a person who was in a fiduciary relationship with the claimant.
Easily satisfied
The conditions are easily satisfied in cases involving misapplication of property subject to an
express trust. Beneficiaries have an equitable proprietary interest in trust property and the
standard relationship between an express trustee and the beneficiaries is a fiduciary one. For
simplicity, the examples used in this Workbook all involve express trusts but they are not the only
circumstances in which you will be expected to apply the tracing rules.
Easily acknowledge conditions are met for trusts arising from operation of law
The court will also easily acknowledge the satisfaction of the Diplock conditions in cases involving
trusts arising by operation of law (such as where a constructive trust is imposed as a remedy for
breach of fiduciary duty). This then allows tracing into property acquired using the profit from a
breach of the no-profit rule.
Diplock conditions are liberally applied
The tracing rules are also applied in a wide range of circumstances, such as where an executor
misapplies estate property or a company director misapplies company property. From these
examples, we can see that the Re Diplock conditions are liberally applied. A company is the full
legal owner of its assets and does not have an equitable interest. Those entitled under a will do
not have proprietary interests at all. Yet both can use the tracing rules.
Claiming and types of proprietary claim
If beneficiaries can follow or trace misapplied trust property, they can assert a proprietary
interest in the trust property (or its traceable proceeds). A beneficiary may wish to make claims in
respect of:
* The misapplied trust property
* Assets purchased exclusively with misapplied trust money (or its traceable proceeds)
* Assets purchased with a mixed fund
Nature of claim made in respect of that asset
Once an asset has been identified, it is then necessary to consider the nature of the claim that
can be made in respect of that asset. There are four potential options:
Four potential options
(a) The beneficiary claims beneficial ownership of the asset: This will only be possible in the
simple case where the asset is acquired exclusively with the traceable proceeds of the
breach.
(b) The beneficiary claims beneficial ownership of a share of the asset: This may be possible in
cases where the asset has been acquired using a mixed fund.
Claims an equitable lien over asset
(c) The beneficiary claims an equitable lien over the asset: This may be possible in both types of
case. Generally a beneficiary will want to do this where the asset has decreased in value,
meaning that claiming the asset would result in a loss. It efectively turns their personal claim
for breach of trust into a secured claim.
Subrogation
(d) Subrogation: This is a claim that can be made where misapplied trust funds (or their traceable proceeds) are used to pay of a secured debt. It allows the beneficiary to step into the shoes of the creditor, treating the beneficiary as if they had loaned the money and enabling them to take equivalent security to that previously held by the original lender