Tracing

Question 1

Difference between personal and proprietary remedies?

Answer 1

If there is personal liability then they may end up only with a proportion of what is owed to them in the case of insolvency (along with other creditors). The availability of a proprietary remedy may allow the beneficiaries to demand the exact property back.

If they have proprietary rights then they will have priority, as they are enforceable against third parties. Proprietary remedies also allow beneficiary to benefit from and claim any unauthorised profits the trustee has made.

Question 2

Nature of proprietary remedies here?

Answer 2

The proprietary remedy available may take the form of ownership rights under a CT. There may be the possibility that beneficiaries to a trust can claim to be the sole beneficial owners of a particular asset or to have a share in the ownership of a particular asset. Alternatively the remedy may take the form of some sort of security rights (some sort of charge).

Question 3

“Following”

Answer 3

They can choose to ‘follow’ the trust property and assert a proprietary claim to that property against whoever now holds it. Following is a purely factual operation, we’re looking to physically locate the property in question and so we’re looking at the movement of property through a succession of new owners. The beneficiaries could then bring a claim and there are defences available.

Question 4

“Tracing”

Answer 4

The other possibility is that they can ‘trace’ the value of the original property in to other property which is acquired in exchange for it. Then they can bring a proprietary claim against this exchange property.

Question 5

Equitable Tracing - Overview

Answer 5

There are different rules in common law for tracing which are much more restrictive. It has been suggested by 2 members of the HoL in the above case that there should be 1 set of rules applicable whether the claim is in common law or equity. The equitable rules would be favoured.

The Innocent Volunteer – in some circumstances there are different rules applicable, depending on whether the defendant is an innocent volunteer or not. It can be crucial to determine this. The tracing rules are more favourable to innocent volunteers and the very basic principle is: where 2 parties claim rights in the same property, if they are both IVs they will be treated equally. If one of them is a ‘wrongdoer’ they will suffer any loss first. The other situation where the situation between an IV and ‘wrongdoer’ matters is in relation to the remedies available.

Question 6

Equitable Tracing - Nature?

Foskett v McKeown

Answer 6

“The [tracing] rules establishing equitable proprietary interests… are an integral part of the property law of England… This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest… It is a case of hard-nosed property rights.” There is not discretion in these rules.

Question 7

Equitable Tracing - Innocent Volunteer?

Boscawen v Bajwa

Answer 7

Millett LJ said the distinction is not between an honest and dishonest person. To be innocent someone should neither know, nor have any reason to suspect that the money/property in question is not his own. Even though someone may be perfectly honest, if that person ought to have known that the property or asset in question belongs to someone else, they will be classed as a wrongdoer for the tracing rules and proprietary remedies, meaning the stricter rules are applicable.

These apply not only to the trustee who acts in BoT who is clearly a wrongdoer, but also to any person who receives trust property with actual or constructive knowledge that it is trust property.

If a wrongdoer has used trust property to acquire an asset and then gives that asset away the donee cannot get a better title than the wrongdoer so the stricter rules apply: Foskett v McKeown.

Question 8

Tracing - The Rules Direct Substitute?

Answer 8

If you had a straight forward conversion of the claimants property into some other asset then tracing is easy. It is possible to trace value through unlimited changes in form so long as that value is kept separate and not mixed with value belonging to anyone else.

The emphasis on property rights can lead to apparent unfairness in some situations though. Sometimes the rules may go too far. The possible claimants to the property in question are not only the claimant and defendant. There may be other creditors of the defendant involved. Property rights give priority over other creditors.

Question 9

Tracing - The Rules Direct Substitute?

Innocent Volunteer?

Answer 9

The situations where it is easier to find problems with the application of the rules tend to arise when the D is an IV. Take a person who unknowingly receives money belonging to a trust. He uses that money to buy an asset. This person could have bought the asset with his/her own money. Had they realised it was trust money they wouldn’t have used it they would have used their own money. This is all totally irrelevant – if you can show that the trust money was in fact used to buy the asset it belongs to the beneficiaries.

This seems harsh on the IV who wants the asset and has enough money to reimburse the beneficiaries but will lose the asset because of these rules. It could be even more unfair to the defendant if the purchase by the defendant has made a profit because the profit will also go to the beneficiaries.

To take an extreme example, lets say a person unknowingly receives trust money and uses $2 of it to buy a lottery ticket and this ticket wins. Winnings are $1m. On the strict property rules the lottery ticket belongs in equity to the beneficiaries of the trust and they are entitled to claim the winnings.

Question 10

Tracing - The Rules

Assets bought partly with the claimants’ money

Foskett v McKeown

Answer 10

Here the claimant is entitled to a proportionate share of the asset. The funds were traced into an insurance policy and there into the proceeds of the policy paid out on the trustee’s death. They were held entitled to a proportionate share of the proceeds of the policy.

Question 11

Tracing - The Rules

Dissipation

Answer 11

Is it possible to trace value into the assets of a defendant – our key Q. One reason we want to do so is to enable the claimant to bring a proprietary claim. In order to be able to bring this the claimant must be able to point to property in the defendant’s possession that in some way represents their property. If the claimant’s property or value derived from it has been dissipated then there will be no property left. No proprietary claim can be brought.

Say for example originally it was a case of valuable wine that has been drunk, then it has been dissipated and no proprietary claim can be brought. Or for example spending the proceeds of shares on a wedding reception. Assuming this has occurred then the property has been dissipated, there’s no property left to claim. Personal claims may still be possible. It is possible to bring a personal claim against someone who has, at some time, had trust property (not just the person in BoT).

Question 12

Tracing - The Rules Mixed Funds?

Overview

Answer 12

More difficult area. The situation here is that the claimant’s money (or proceeds from claimant’s property) has been mixed with money belonging to someone else. This will usually have been in a bank account. The other party who’s money has been mixed may be a wrongdoer or IV. There is no doubt that the claimant is entitled to proprietary rights over the mixed fund.

If no money has been withdrawn and nothing has changed then the claimant undoubtedly can assert a proprietary right over the money in the account. This is not what usually happens and problems occur when some or all of the money in that mixed account has been withdrawn.

There are may possible scenarios: there may be some money in the account and then whose is it? Some of the money withdrawn may have been used to buy an asset – whose money has been withdrawn and who does the asset belong to? The situations we’ve looked at so far have a logical solution, here there is not one.

The rules are based on policy, fairness, intention. We have special, equitable rules of identification. These are basically presumptions as to whose money has been withdrawn. Many of them were established a long time ago when banking was far less complicated. Sometimes they don’t always work satisfactorily now.

There are different rules whether the claimants money was mixed with an IV or wrongdoer. It is worth saying it doesn’t matter who the account belongs to but whose money is in the account. Say we have a trustee who is trustee of 2 separate trusts. He misappropriates funds from both and pays them into an account then the money in the account both belong to IVs and these are the rules we will apply. It is irrelevant the account belongs to a wrongdoer.

Question 13

Tracing - The Rules Mixed Funds? -

Wrongdoer

Re Hallett’s Estate

Answer 13

Where money withdrawn had been dissipated but sufficient money remained in the account to meet the claim of the Bs, a beneficiary was held to be entitled to claim it on the grounds the trustee was deemed to have acted rightfully and preserved the trust fund and not to have used it for unauthorised purposes. Bear in mind the effect that Re Oatway had on this principle.

Question 14

Tracing - The Rules Mixed Funds? -

Wrongdoer

Re Oatway

Answer 14

Where no money remained in the account a beneficiary was entitled to claim shares bought with money first withdrawn (where the money later withdrawn had been dissipated) on the grounds the trustee was taken as owning any monies not recoverable and he was not free to use his own money free of the rights of the beneficiaries until the trust fund had been restored.

At the time of his first withdrawal there was enough of the trustee’s own money in the account to buy those shares. So if the courts had gone for a strict application of Re Hallett then they would have said that the T had spent his own money first because he was acting rightfully, preserving the trust fund and then the shares would have belonged to the T and therefore the money that was later withdrawn and dissipated would have been the trust money. The judge refused to take that approach.

Question 15

Tracing - The Rules Mixed Funds? -

Wrongdoer

Turner v Jacob

Answer 15

What if at the time of the claim there is money remaining in the account but some of the money has been withdrawn by the T and successfully invested? In that case sufficient money remained in the account, the money that had been withdrawn had been used to buy property. The question was whether the Bs could claim that property rather than claiming the money in the account.

It was held that the general rule is that in Re Hallett – that the T will be taken to have spent his own money first and to have preserved the trust fund. The judge was of the view that Re O reverses that rule only on the specific facts of the case where there was no money left in the account. According to Turner if sufficient money remains in the account then the claim is limited to that money in the account.

Turner only deals with the position where there is sufficient money remaining in the account to meet the claim.

Question 16

Tracing - The Rules Mixed Funds? -

Wrongdoer

Scenarios where no direct authority exists - #1 There is some money in the account, but insufficient to satisfy the beneficiary’s claim?

Answer 16

Clearly on facts like this the T must have used at least some of the trust fund to purchase the asset in question. What approach should we take? We could extend Turner - we could say that as long as there is some money remaining in the account, the C has to take that first and only in so far as there is a shortfall can a claim be bought against any assets bought with withdrawn money.

So in that situation the Bs would get the money in the account and a proportion of the asset brought Or we could say that if there is insufficient money remaining in the account, then Re H and Turner can be distinguished. We can say that the T has clearly spent at least some of the trust money on the asset and so he has clearly not preserved the trust fund. Then it would be open to the court to decide on an approach – whether to give the B a choice, the money in the fund plus part of the asset or whether to give the B a % of each.

Question 17

Tracing - The Rules Mixed Funds? -

Wrongdoer

Scenarios where no direct authority exists - #2 There is no money in the account and two separate assets have been purchased with withdrawals from the funds?

Answer 17

Do we use Re H and just look at the order in which the assets have been purchased and say that whatever has been purchased first is the Ts? Presumably we can take into account any changes in value of the asset. If one of the assets have plummeted in value then this falls in the notion of Re O that sums that are not recoverable belong to the T. So we could use this case to say that bad investments belong to the T.

Or we could say that it is clearly not covered by authority, once there is no money in the account then Re O allows a claim against assets purchased, with no rules as to which. So do we allow the B a proportion of each asset. Do we allow the B a choice on the grounds that the T cannot prove which he bought with his own money.

Question 18

Tracing - The Rules Mixed Funds? -

Wrongdoer

Roscoe v Winder

Answer 18

Claim to moneys remaining in account limited to lowest intermediate balance. If a T withdraws money from the account and then later pays in more money then that later payment in is not presumed to replace any sum withdrawn earlier.

Question 19

Tracing - The Rules Mixed Funds? -

Wrongdoer

Roscoe v Winder - Exceptions

Answer 19

(1) If the deposit was the proceeds of something bought with money that was originally withdrawn from that account. So if you could apply the rules we have already looked at and say that an earlier withdrawal was of the Bs money and it was used to buy something that led to the money that is paid back in then you can trace it back into the account.
(2) If trustee stated that he was replenishing the account for the benefit of the Bs. In which case there would be an express trust. The rule only prevents a proprietary claim being brought against later monies paid into the account. There is still the possibility of suing trustee personally for breach of trust and obviously we know he has money in the account.

Question 20

Tracing - The Rules Mixed Funds? -

Innocent Volunteer

Basic rule: pari passu:

Sinclair v Brougham

Re Diplock

Answer 20

Where both/all claimants to the money in the account are innocent then they share proportionately. Example - Tim gives £4,000 to his son, Simon, on his 21st birthday. Simon, who knows nothing of Tim’s breach of trust, pays the £4,000 into his account at the Dunkirk Bank in which he already had £1,000. He then withdraws £2,000 which he uses to purchase shares in Abco Plc.

We look at the money that was in the account (4,000 belonging to the trust and 1000 belonging to S) S is an innocent volunteer, so we apply the pari passu rule. So S and the Bs are entitled to the appropriate proportion of what remains in the account and anything that has been brought with withdrawn funds. So the Bs will be entitled to 4/5 of the 3000 that remains in the account and they will be entitled to 4/5 of the shares in Abro Plc. S will be entitled to the other 1/5 of the money in the account and the shares.

Question 21

Tracing - The Rules Mixed Funds? -

Innocent Volunteer

Special rule for an active banking account:

Clayton’s Case - the first in, first out rule.

Answer 21

An active banking account is effectively a current account.

Example - Tim gives £4,000 to his son, Simon, on his 21st birthday. Simon, who knows nothing of Tim’s breach of trust, pays the £4,000 into his account at the Dunkirk Bank in which he already had £1,000. He then withdraws £2,000 which he uses to purchase shares in Abco Plc.

If S’s account were a current account then when he makes the withdrawal of 2000 he will be regarded as withdrawing first, whosever money was first in the account (first in, first out) His own money was in the account before he paid in the trust money so he will be regarded as withdrawing his own 1000 and 1000 of the trust money.

This means that under the rule in Clayton’s case, the full 3000 remaining in the account belongs to the trust Whereas the shares have been bought with 1000 of Ss money and 1000 of the trust money and so they are entitled to half of the shares each The rule in Clayton’s case is one of convenience, it is said to be based on the presumed intention of the parties, but it can operate unfairly on those whose money was in the account first:

Example – we have a T who is a T of trust A and B. He misappropriates 5000 from each of the trusts. He pays both 5000 into the same bank account, the money from trust A is paid in one day before the money from trust B. T then withdraws 5000 from the account and dissipates it. So the only asset remaining is the money in the account. If we apply the rule in Clayton’s case the money in trust A went in first so it comes out first, so the whole of the money in the account belongs to trust B and trust A has no proprietary claim. Simply because the one payment went in a very short time before the other, the rule in Clayton’s case means that one trust gets the whole of their money back and the other gets nothing.

Question 22

Tracing - The Rules Mixed Funds? -

Innocent Volunteer

Special rule for an active banking account:

Barlow Clowes International Ltd v Vaughan

Answer 22

The rule in Clayton’s case was confirmed to be the prima facie rule to apply where you have an active banking account, however there are 2 exceptions where pari passu is used instead:

1. Where it is contrary to the presumed intention of the parties: Barlow Clowes International Ltd v Vaughan. Need to look at the details of any relevant scheme,and deduce an intention as to their expectations. It would be more difficult to ascribe an intention to a claimant whose money has been paid into an account without his or her knowledge.
2. Where application would be impractical/ onerous, or where it would result in injustice between the parties: Commerzbank Aktiengesellschaft v IMB Morgan plc. See also Woolf LJ, Barlow Clowes International Ltd v Vaughan – he referred specifically to the example where the effect of applying the rule in Clayton’s case is likely to exhaust the fund.

These comments were applied in Commerzbank, where the view of the court was that it would be onerous and perhaps impossible to determine which sums had been paid out under Clayton’s case. This was due to the nature of the account in question.

Question 23

Tracing - The Rules Mixed Funds? -

Innocent Volunteer

Special rule for an active banking account

Pari Passu not the perfect alternative?

Answer 23

The reason is that the pari passu rule ignores the timing of any deposits and withdrawals, so it ignores the lowest intermediate balance and so it can be unfair to later contributors to the fund. This point was made by Dillan LJ in Barlow – when faced with the argument that Clayton’s case should not be applied because it was unfair to earlier contributors he said that was not a good enough reason to disapply Clayton’s case because pari passu was unfair to later contributors.

Question 24

Tracing - The Rules Mixed Funds? -

Innocent Volunteer

Special rule for an active banking account:

Rolling Charge Method?

Answer 24

This works on the basis of pari passu but takes into account the timing of withdrawals. So on the example, we would look to see whose money was in the account at the time of the withdrawal (on that example only trust A and trust B). So the withdrawal would be proportionately part of trust A and part of trust B and then of course when trust C pays their money in we would for any future withdrawals look at any proportions depending on whose money was there when trust C money went in.

But if you had a large number of deposits and withdrawals over a period of time then it would be expensive and tiem consuming to determine whose money was there before each payment. So the rolling charge was rejected by the courts in Barlow and Russell Cooke on the grounds that it was too complicated and expensive to operate. LJ Wolf in Barlow did suggest that if at any time an account becomes overdrawn then anyone whose money was put in before that time would no longer be able to claim, but obviously that is only limited in effect.

It was suggested in Russo that in a simpler case perhaps the lowest intermediate balance could be taken into account.

Question 25

Tracing - The Rules

Debts

Re Diplock

Answer 25

Claimant’s money has been used to pay off a debt. There is authority that where this is the case then tracing is impossible. The argument is that where money is used to pay off a debt that this money is effectively dissipated. Because once a debt has been repaid then it ceases to exist. So there is no property (no asset in existence) once the debt has been repaid to which a proprietary claim can be made.

Question 26

Tracing - The Rules

Debts - Overdrawn

Accounts Bishopsgate Investment Management Ltd v Homan

Answer 26

Again tracing is not possible where money is paid into an overdrawn account, because an overdrawn account is non-existent, there is no property.

Question 27

Tracing - The Rules

Debts - Secured Debts?

Boscawen v Bajwa

Re Diplock

Answer 27

Boscawen: The Cs money was used to pay off a charge over the Ds land and the CA was prepared to trace the Cs money into the discharge of the charge and then the CA gave the claimant the remedy of a charge by subrogation. What the CA basically did was, was that rather than the original charge ceasing to exist altogether, the CA determined that that charge continued to exist for the benefit of the C.

Question 28

Tracing - The Rules

Debts - Secured Debts?

Summary?

Answer 28

We therefore have conflicting authority. Re Diplock was HL and Bajwa was CA. Millet was of the view that Re Diplock should be confined to its own specific facts and that there should be a general rule that it is possible to trace. Obviously it is therefore open to a court in the future to go either way. There is one factor that may be relevant – when deciding Bajwa Millet LJ was of the view (and this was the general view at the time) that a defence based on fairness or change of position might be available.

He was of the view that even if he decided that it was possible to trace into a secured debt an innocent volunteer might actually be able to avoid this result, avoid a charge by subjugation on the grounds of unfairness. Since then the HL in Foskett has expressed the view that a defence based on fairness or change of position is not available based on the tracing rules.

So it is possible a court may take a different approach because Millet LJ was happy to allow tracing because he thought the court might have the discretion as to whether a remedy was actually awarded in particular cases. Now the position seems to be that if tracing is available then there is a right to a remedy, there is no discretion regardless of the circumstances.

Question 29

Tracing - The Rules

Backwards Tracing - Overview

Answer 29

This is an unclear area of law. It has been argued that although it is impossible in most cases to trace into a debt it should be possible to trace backwards into any asset that was acquired in exchange for incurring the debt. The main proponent of this argument is Lionel Smith (see Smith (1995) 54 CLJ 290) The argument is: say a D goes out and buys a car on credit or with the aid of a loan and he then uses the Cs money to pay off that loan.

The argument is that although the claimant would not have a proprietary remedy in relation to the payment off of the debt, the C should be able to trace backwards and have a proprietary remedy over the car. The cases are inconclusive as to whether backwards tracing is possible. It was used at first instance in Westdeutsche Landesbank Girozentrale v Islington LBC [1994], there are other cases which commentators claim to be explicable only as examples of backwards tracing, but backwards tracing was never referred to in those cases.

The recent case of Brazil v Durant is very persuasive evidence from the Privy Council that BT would be available in the future if considered by the Supreme Court.

Question 30

Tracing - The Rules

Backwards Tracing - Conflicting Cases

Answer 30

Bishopsgate Investment Management Ltd v Homan (Dillon LJ for, Leggatt LJ against)

Foskett v McKeown (Scott V-C for, Hobhouse LJ against)

Question 31

Tracing - The Rules

Backwards Tracing -

Argument for Backwards Tracing

Answer 31

On the other hand Dillan LJ in Homan and VC Scott in Foskett were in favour of backwards tracing in some circumstances, in particular where it can be said that the D always intended to repay the loan with the Cs money. They both discuss the particular situation of a purchase by use of an overdraft, where the D could be said to have always intended to purchase the asset with the Cs money, it is just that in fact they purchased by way of an overdraft and then paid the claimants money into the account shortly afterwards.

Both judges took the view that in such a situation the court should look at the substance of the associated transactions. So the precise order of payments should not be crucial. If backwards tracing is available and if it is limited to the situation where the D always intended to use the Cs money then that would suggest that primarily backwards tracing will only be available against a wrongdoer, because only a wrongdoer is going to know that they are going to be getting trust money which they are then going to use to purchase an asset. Clearly it would be more difficult if you were trying to assert backwards tracing against an innocent volunteer.

Question 32

Tracing - The Rules

Backwards Tracing -

Argument against Backwards Tracing:

Answer 32

The argument is that you cannot trace into something that the D had already acquired before he received the Cs money. But you cannot say that an asset was brought with the Cs money if it has been acquired at an earlier time. Support for this was provided by Leggatt LJ in Homan and Hobhouse in Foskett.

Question 33

Tracing - The Rules

Backwards Tracing - Current Position?

Federal Republic of Brazil v Durant International

Answer 33

The Board held that the Municipality could trace the full amount of the Bribe Proceeds into Account C, since backward tracing was permissible – a point that was previously unclear in English law , but this decision is strongly persuasive authority that it should be available.

Ultimately, the Board recognised this was a matter of policy. The key concern was deterring and punishing fraud. The court should not allow “a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect”.

Fraudsters should not be permitted to orchestrate transactions with the aim of defeating claims. Backward tracing should therefore be available where a claimant could – looking at the transaction as a whole – establish a coordination between the depletion of trust property and the acquisition of the substitute property.

Question 34

Tracing - The Rules

Backwards Tracing - Current Position?

Federal Republic of Brazil v Durant International

Impact?

Answer 34

This is a welcome decision for victims of fraud. By holding that the rules of equitable tracing should be more flexible – focusing on the substance of a transaction rather than its form – the law is better equipped to deal with complex schemes designed to launder money.

Backward tracing also deals with the more technical problem arising where banks may have recorded a credit prior to a debit, even though the transfer of funds from one account to another was causally and transactionally linked (for example, where a cheque is credited to an account before the corresponding debit is entered by the paying bank).

There may be concerns that the decision creates uncertainty. The equitable rules of tracing have developed (some would say generously) to circumscribe the way in which claimants can evidence what has happened to their property. The test proposed for backward tracing is broad, and will inevitably mean more discretion on the part of judges.

In other contexts, the English courts have rejected calls to focus less on form in the interests of achieving justice in a particular case (for example, English law does not recognise remedial constructive trusts). In this respect, the Privy Council’s decision suggests a change of emphasis – from legal certainty to the need to fight fraud in the modern world and uphold fiduciary duties.

Finally, unsecured creditors will be concerned that, if the Privy Council’s decision is followed, victims of fraud may be able to take advantage of a further weapon with which to assert proprietary claims, meaning they will enjoy priority if the fraudster is insolvent. The high evidentiary threshold recommended by the Board for backwards tracing (i.e. the need for a close causal and transactional link) would, however, ensure that backward tracing is only possible in the clearest instances where a corrupt deal has been made possible only through the misuse of trust property.

Question 35

Tracing - The Rules

Expenditure on maintenance or improvement of property -

Overview

Answer 35

Where a person spends trust money on property he already owns. We are not looking at the situation where the D buys a new asset with the Cs money. We are dealing with the situation where the D already owns the property in question and spends the Cs money on it.

For example of the D already owns a house and he uses trust money to replace the windows, roof or kitchen. If a new asset is bought with C + Ds money (for example their combined money is used to buy shares) then we can divide ownership of those shares proportionately to their contributions. But here it is more complicated; we are talking about whether or not to give the C an interest in property that originally belonged to the D only.

Bare in mind that spending money on an asset may increase its value, but it may not. If you put a new roof on a property that is dilapidated then it probably will increase the value, but replacing a perfectly good kitchen will probably have no effect on property price.

Question 36

Tracing - The Rules

Expenditure on maintenance or improvement of property -

Current Authority Foskett v McKeown

Answer 36

The CA thought that the situation in this case was similar to spending money on property already owned. The HL did not think there was this similarly though the HL did make some comments about the relevant principles.

The position seems to depend on two factors:

(1) is the owner of the property in question a wrongdoer or innocent volunteer?
(2) has the expenditure on the property increased its value or not?

Question 37

Tracing - The Rules

Expenditure on maintenance or improvement of property -

Situation A – value of property has not increased due to expenditure (property owned by an innocent volunteer)

Answer 37

It is not possible to trace into property owned by an innocent volunteer if it has not increased in value); the money is regarded as having disappeared/ having been dissipated. This seems to be reasonably well established on the authorities: Re Diplock (CA) where it was one of the reasons for the decision of the court and Foskett v McKeown (CA).

It seems to be an acceptable position - there is nothing to represent the expenditure, it has effectively disappeared into the Ds property and if you allow tracing the innocent volunteer would definitely suffer loss, because they would still have property of the same value but part of that property would belong to someone else.

Question 38

Tracing - The Rules

Expenditure on maintenance or improvement of property -

Situation B - value of property has not increased due to expenditure (property owned by an wrongdoer)

Answer 38

If we continue with that reasoning, then surely the same principle applies against a wrongdoer, because the value has still disappeared. However there are some dicta in Foskett v McKeown that may suggest otherwise. It is possible to trace into property owned by a wrongdoer if it has increased in value (Foskett v McKeown (CA)); the position where it has not increased in value is not entirely clear.

Hobhouse LJ may have suggested otherwise – in his judgment he refers to the value of the property after the expenditure limiting the claim, which would seem to suggest that you are looking for an increase in value, but he did not specifically refer to a wrongdoer - matter of policy if it is allowed.

Question 39

Tracing - The Rules

Expenditure on maintenance or improvement of property -

Situation C – The property has increased in value (claim against wrongdoer)

Answer 39

In a claim against a wrongdoer, there is no doubt that tracing is available against a wrongdoer where property has increased in value. The CA in Foskett (Hobhouse and Scott) made it clear that a T cannot profit from his own wrongdoing. Comments to the same effect seem to have been made in the HL in Foskett by Lord Hope and Lord BW.

So it seems almost certain that tracing is available. What is not so clear is what value can be traced. We have two values:

(1) the value of the expenditure
(2) the increase in value of the property

In a rare case they may be identical, but other than that the property may have increased in value by less than the expenditure or more than the expenditure. We have inconsistent comments in Foskett in this regard – Lord BW was of the view that the maximum possible claim is for the amount expended plus interest.

But that seems wrong because if the property has increased in value by more than the expenditure, if we take Lord BWs approach then the T/wrongdoer gets to keep the profit and that seems unlikely. If the property has increased in value by less than the expenditure then that links back to the point that part of that expenditure would seem to have disappeared.

Question 40

Tracing - The Rules

Expenditure on maintenance or improvement of property -

Situation D – Property has increased in value (claim against an innocent volunteer)

Answer 40

The position seems to be that tracing may be available but it is not clear VC Scott, Hobhouse LJ and BW in Foskett all suggested that tracing may be possible, but not if it would be unfair. They all referred to Re Diplock and to the fact that tracing is unfair if no value is added to the property. But they do not make it clear whether or not it would be unfair to trace in other circumstances.

As a matter of policy → on the one hand you can say that even an innocent volunteer should not be able to profit from spending someone else’s money so that tracing should be available where the property has increased in value because that increase in value is the result of spending someone else’s money.

The problem is the practical effect of allowing tracing, because if tracing is possible then a proprietary remedy will be available. So the claimant will get rights in the Ds property and the C will be able to insist that the D sell that property unless the D can pay off his claim. That can be very hard on a D that does not have the assets available to pay off a claim.

In theory the argument goes that the D now has property of a higher value and a loan can be taken out secured on this property in order to pay the claimant. But your ability to get a loan will also be dependent on the Ds financial situation, so he may not be able to get a loan. If tracing is available against an innocent volunteer what value can be sought?

It obviously cannot be greater than any increase in value. We have seen that it does seem to be pretty well established on the authorities that any expenditure that is not reflected in an increase in value is regarded as having disappeared, so the maximum will be the increase in value.

Other than that Hobhouse in Foskett was of the view that the maximum will be the expenditure on the property and arguably BW would take the same view because he thought that the expenditure was the maximum as against a wrongdoer. But the issue does arise if the increase in value is greater than the expenditure do we allow an innocent volunteer to profit?

Question 41

The need for a fiduciary relationship

Re Diplock

Affirmed in: Westdeutsche Landesbank Girozentrale v Islington BC

Answer 41

There is a precondition to be able to trace in equity – in order to be able to trace in equity it is clear that at some time the property must have passed through a fiduciary relationship. There does not have to be a fiduciary relationship between the C and D, the property just needs to have been affected by a fiduciary relationship at some time before the claim is being brought.

In most cases there is no problem. Problems will arise in commercial situations; there will often have been a breach of FD. In other cases where there has been a misappropriation of property or a mistaken transfer of property in order for the tracing rules to be available then you have to show that the misappropriation of property or transfer gave rise to an implied trust, so that the effect of the misappropriation was that a resulting trust arose or a CT was imposed. There are cases where the courts have imposed a CT or resulting trust so that tracing is possible.

We saw that the remedies available for breach of FD, the SC has recently held in FHR Ventures that there is a proprietary remedy available in the case of a bribe because they want to allow for tracing and following. Ultimately the reason for the need for the fiduciary relationship is because the C needs to be able to show that he had an equitable proprietary interest in the original property, which he is then seeking to trace into new property.

An equitable interest is not sufficient - it has to be an equitable interest as a result of a fiduciary relationship. This means that a person who is at all times a legal and equitable owner cannot trace his interest in equity.

Question 42

Proprietary Remedies - Overview

Answer 42

Situation: a claimant has managed to trace value into the hands of the D or perhaps followed as well or instead. Having followed the evidential trail the claimant then might choose to go for a proprietary remedy, a personal claim, he might seek a remedy at law or in equity. What we are concerned with is the assertion of an equitable proprietary claim. We are concerned with once the claimant has been able to trace value then what kind of equitable proprietary claim can the C make?

If a claimant can trace into value in the hands of the D, then he is entitled to an equitable proprietary interest in that property. The courts have no discretion. There may be alternative proprietary remedies available, but that is at the Cs choice. There is no doubt that the C has proprietary rights in the property at question. The precise remedy will vary with the circumstances.

Question 43

Proprietary Remedies - 2 Possibilities

Answer 43

(1) Claimant is entitled to an ownership or security interest. So he may be entitled to assert full beneficial ownership of the property in question or he may be entitled to a share of the beneficial interest
(2) Alternatively the claimant may get a security interest in the property. So he may get an equitable charge or lien over the property, which is security for his personal right to sue. He would have a personal right to sue the T for breach of trust and if he succeeds then the security will be relevant, but if he does not manage to successfully sue then the property is security for his claim and he can demand that the property be sold and he be given the proceeds.

Question 44

Proprietary Remedies -

Specific Situations

(a) Original property or its proceeds of sale remains intact

Answer 44

The D still has the Cs property or someone else still has the Cs property, or the D has sold the property and still has the proceeds of sale on their own/ separate. In this case there the C will be the owner of the property or its proceeds of sale under a constructive trust (CT) and therefore the court will order that the property is transferred to the claimant or transferred back to the trust.

Question 45

Proprietary Remedies -

Specific Situations

(b) Claim to money in a bank account

Answer 45

Cs money or proceeds have been paid into a bank account that contains other money too (it has not been kept separate and therefore we cannot automatically apply a CT). The remedies differ depending on if the other money in the account belongs to a wrongdoer or volunteer.

If the other money in the account belongs to a wrongdoer → Lien for amount of personal claim plus interest.

If the money in the account belongs to an innocent volunteer → The claimant is entitled to a proportionate constructive trust with the innocent volunteer.

The reason it’s a CT instead of a lien because if the claimant had a lien he would have priority over other C to the account, but where both of the parties are innocent then they need to be treated equally.

Question 46

Proprietary Remedies -

Specific Situations

(c) New asset purchased with claimant’s money only

Answer 46

The starting point is that the new asset belongs to the claimant because it has been bought with his money and it will be held on CT for him.

As an alternative to claiming ownership the C can choose to enforce his personal claim against the T for the value of the original property plus interest and have this personal claim secured over the new asset by means of an equitable charge or lien.

This is clear from:

Re Hallett’s Estate

Foskett v McKeown

This seems fair – the C did not choose to buy this new asset, the C may not want the new asset. What would influence the Cs choice as to remedy? Why would the C choose the new property or simply a personal claim with lien over the property?

It is likely to be affected by whether he wants that actual property. If it is something desirable that he would like to own then he might choose to own that despite its actual value. The other relevant factor will be the present value of the new asset.

Question 47

Proprietary Remedies -

Specific Situations

(d) New asset partly purchased with claimant’s money (and partly with someone else’s money)

Answer 47

This was discussed by the HL in Foskett. This time the starting point is that the C is entitled to a proportionate share of the beneficial ownership under a CT. So you use the tracing rules to decide whose money, how much of whose money went to buy it and work out the proportions.

But the C has a choice of an alternative remedy against a wrongdoer (but not against an innocent volunteer). As against a wrongdoer the claimant can instead go for a lien to support his personal claim.

Again the choice will be influenced by what has happened to the value of the property.

If the shares have decreased in value: lien supporting the beneficiaries’ personal claim plus interest, this takes priority.

If the shares have increased in value: beneficiaries don’t just want their money back they will want to benefit from the increase in value and so they will claim a ½ share under a CT.

A wrongdoer suffers any loss first, whereas if we had innocent volunteers then they get proportionate shares and will share any increase or decrease in value.

The remedy can be criticised. Even against an innocent volunteer, the C gets a proportionate interest under a CT and therefore shares in any increase in value of the property. There are two situations where the results may not be justifiable:

Where a claim is against a wrongdoer and property has increased in value and the C will claim a proportion under a CT and will get a proportion of the increase, but so will the wrongdoer.

The other area in which it is criticised relates to a claim against an innocent volunteer. There are two situations where its argued the C should get none of the increase in value:

(1) where the C could have bought the asset with his own money, he just didn’t because he did not realise he was using trust money
(2) where the increase in value is as a result of the Cs efforts (maybe C bought a rundown property and personally renovated it). Suggestions vary from he should get an allowance for his work and skill to he should be able to keep the whole increase in value.

Question 48

Proprietary Remedies -

Specific Situations

(e) Claimant’s money used to alter, improve or maintain another’s property

Answer 48

It would seem from comments from Fostkett that the only possible remedy is a lien, whether the claim is against an innocent volunteer or wrongdoer. To some extent that is inconsistent with what we have looked at, but it gives the C priority over an innocent volunteer, but it does mean that the C does not share in future increases in value of the property.

Whichever the remedy, whether a lien or a share under a CT, the claimant can seek a sale of the property → for a lien they can force a sale, with an interest under a CT they can apply to the court under TOLATA.

Question 49

Proprietary Remedies -

Specific Situations

(f) Claimant’s money used to pay off a secured loan

Answer 49

If tracing is possible then the remedy will be a charge by subrogation: Boscawen v Bajwa.

Question 50

Defence

Answer 50

The only defence available is that of a bona fide purchaser for value of the legal estate without notice (as modified by statute, particularly in the case of land where there is the requirement of registration.)

Even where notice remains relevant, so primarily property other than land, the meaning of notice varies with the property, because notice is not limited to actual notice but also includes constructive notice. In relation to land, constructive notice has a wide meaning because there is a duty on the purchaser of land to make appropriate enquiries, which include inspecting the land and title deeds and following up anything suspicious.

For property other than land there is no such absolute duty of enquiry, there is only a duty to enquire when there is something suspicious. In applying the bona fide purchaser defence, it very much depends on what is expected of the purchaser in the circumstances.