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Procedural rules that establish whether or not a claimant can bring a claim

1. The claimant has to establish that he satisfies four pre-conditions:

(i) There has to be a prior fiduciary relationship before the claimant's claim can be made (Re Diplock)

if it is a trustee and beneficiary relationship, there will always be a prior fiduciary relationship

however, cases such as Westdeutsche, where Lord Browne-Wilkinson recognised the harsh consequences of this rule by insisting a prior fiduciary relationship between the beneficiary and the person he is going after

that breaks down if the trust asset is stolen as the beneficiary obviously does not have a fiduciary relationship with the thief, this will cause problems to the beneficiary for pursuing that claim

on the other hand, Australian court appears to be moving towards jettisoning the requirement

Einstein J in Commonwealth Bank of Australia v Saleh said that `the better view' was that tracing protects property rights, rather than enforcing fiduciary relationships

Judges in English court though, even though they recognised this rule as being problematic and criticised in their judgments, they have never gone as far as removing the requirement

but, in circumstances of trustee and beneficiary, providing that there is no theft of the trust asset, it shouldn't be a problem

(ii) There has to be a proprietary base

The claimant has to establish that he is in principle entitled to assert an equitable proprietary right to the original asset/substitute asset establish that he has an identifiable right to make a claim in the original property)

it needs to be clear that the beneficiary has an equitable proprietary interest in the original asset/substitute asset that is in the defendant's hand

Original property - if C is a beneficiary under a trust, he has an equitable interest in the original trust property

Substitute property - according to Foskett v McKeown (HOL), a beneficiary has a continuing equitable proprietary interest in any substitute asset for which the original trust property has been exchanged or substituted

(iii) The claimant has to establish that he is in principle entitled to trace in equity

there has to be a breach of trust (fiduciary duty) by the trustee

(iv) The claimant has to establish that D will have no defence that he will be able to claim

1. Equity's Darling

bona fide purchaser in good faith without notice

2. Change of position

if D has received the property in good faith, and have suffered some changes in personal circumstances which would make it inequitable to force him to return that property, such as what Lord Golf said in Westdeutsche Landesbank v Islington

it is up to the court to decide whether it will be unfair to force a D to repay

3. Passing on

if D has already passed on the property to another party or incurred some expenses, it means that the value of the trust asset has effectively been passed on

here, D will be able to claim that he is no longer in possession of the property, and also any of its traceable proceeds

2. The claimant needs to identify the relevant property in the D's hand, through the processes of tracing or following

when there has been a breach of trust, a beneficiary can make a claim against the trustee for breach of his duty, to claim for

(i) personal remedy - enforceable against the individual who committed the breach (trustee), and the remedy is usually the award of damages (equitable compensation, a payment in recognition that there has been a breach), or

(ii) proprietary remedy - enforceable over the trust property itself or its substitutes

to figure out how the claimant can then pursue a claim, we need to first identify the property

there are two types of evidential rule - tracing and following - that will help to prove that B has an equitable interest in the property that is now in D's hands, by figuring where he can go & what argument he can make

* tracing and following don't apply if the asset is dissipated

1. Following

a process of tracking the original asset as it moves from hand to hand/person to person, but that asset only

the question is who has that original asset now

a following claim requires simply that a specific piece of property is followed and identified by its original common law owner, thus being returned to that original owner

2. Tracing

a process of tracking the value inherent in the original trust asset from original asset to substitute asset

a tracing claim concerns the identification of property or value in which the claimant has some pre-existing interest which the court is then asked to recognise

it is a process of tracing a right in an original asset into subsequent items of property or value

a process of identifying the value of a new asset/substitute for an old asset which has been substituted/mixed

Should the claimant pursue claims at common law or in equity?

common law tracing is much more restricted than equitable tracing

i. Common law tracing

when the trust property has been misappropriated by the trustee, common law tracing can trace the original assets or the equivalent value of that original asset

its purpose is to establish proprietary rights in an asset, so when there is an infringement of a proprietary right at common law, the claimant will be entitled to one of the two available remedies: (i) conversion, or (ii) money had and received

however, it will sound in personal remedy only

the original asset could be traced to the original asset + the profit made on it

rather than the old strict interpretation of tracing at common law (where proprietary claims could only result in conversion/money had and received, and the personal remedy is just in the asset itself),

the court is a little bit more relaxed than it used to be, and has expanded slightly the boundaries of what a claimant could ask for when they bring a proprietary claim at common law

Jones (FC) & Sons (Trustee) v Jones (CA)

FACT: Knowing that the firm was going to bankrupt, a business partner of the firm withdrew £12,000 and invested it for his wife's benefit. Resulting from that investment, there was a profit of around £50,000, where the wife was the one in receipt of the cheque of the investment profit. The firm went bankrupt and the trustee in bankruptcy brought a claim.

HELD: CA accepted that the claimant was entitled to the extended amount

(i) Clean substitution

a classic example of clean substitution

Banque Belge v Hambrouck

FACTS: A cashier stole his employer's money. He then opened up a new bank account to put in that money and gave the money to his mistress. She spent some of it and have about £315 remaining in the account.

HELD: The court held that this is a clean-cut clean substitution case, because at each point in that story, it was absolutely clear where the misappropriated fund had gone. It doesn't matter even if she had spent some of that money, we could still trace a clear line from the original set to where it ended up

(ii) Mixed substitution

where trust assets are intangible/financial in nature (eg. money) rather than something tangible, it is more likely that it will be mixed into other assets, the common law is very cautious about allowing tracing

because in common law's view, a claimant should only have a right to the original asset or to an equivalent value

Tracing at common law is only possible when there is clean substitution

Taylor v Plumer

this is a case involved tracing in equity, but the court made comment on tracing at common law

the court established very clearly that the original asset/value of that asset can only be traced at common law when it is clearly ascertainable. Once it becomes blended with other forms, it is no longer possible to establish the movement

When the level of mixing is so complicated that the court determines it is no longer possible to identify which bit of the remaining asset came from the original asset, we cannot trace at common law

Agip (Africa) Ltd v Jackson

FACTS: assets were misappropriated from the trust and went through several bank accounts in New York and London, and various parties along the route changed nnames

HELD: the court said common law tracing is not going to work

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ii. Equitable tracing

if a claimant brings up a proprietary claim at equity, it sounds in both personal and proprietary remedies

when the trust property has been misappropriated by the trustee, equitable tracing can trace the original assets or the substitute assets, and also any profit generated from that asset

its concern is the claimant's right to the asset, and whatever happens to the asset after that

proprietary right in equity are more extensively protected because

(i) broader range of relief - personal + proprietary remedies

(ii) proprietary remedies are more durable - declaration of trust/imposition of equitable charge or lien (whilst personal remedy is limited to things like damages)

(iii) proprietary remedies are capable of having a binding effect, and so are protected by property law

(iv) if the defendant becomes insolvent, a proprietary remedy will give the claimant greater priority than any unsecured creditors

Therefore, where the claimant might wish to have a proprietary remedy, we shall trace the asset in equity rather than common law

5. The claimant needs to establish that he can in fact

(i) follow the original asset or

(ii) trace the value of the original asset through substitute property

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the courts seem to be prepared to impose whichever remedy seems to be most appropriate in the circumstances and whichever remedy provides the most convenient solution for the successful claimant

The onus is on the claimant to claim the remedy which is most appropriate in the circumstances

Protection of proprietary rights at common law

infringement of a proprietary right at common law usually sounds in personal remedy only

if a claimant brings up a proprietary claim at common law, he is going to be entitled to one of the two available personal remedies:

i. Action of conversion

applies to the misuse of chattel, where goods have been misappropriated/used in a manner that is inconsistent with the rights of the true owner chattels

according to Torts (Interference with Goods) Act 1977, where there is an action for conversion, the claimant is entitled to

(i) seek for the chattel itself back, or

(ii) seek relief by the form of damages (the value of the chattel at that time)

ii. Action for money had and received

applies when money is misappropriated by the trustee and given to another party

the claimant can bring a claim against D on the basis that D has been unjustly enriched

the claimant can seek repayment/damages for D's unjust enrichment

Protection of proprietary rights in equity

infringement of a proprietary right in equity can sound in both personal and proprietary remedies

a. Personal remedies

might be equitable compensation

b. Proprietary remedies

most actions are proprietary

If the property is of a fungible sort – like money in a bank account or salt in a salt cellar – and if the claimant wants the property itself, then the claimant will seek a constructive trust over the entire fund so that the claimant is beneficially entitled to an appropriate proportion of that fund.

if the property is not property which the claimant would wish to own but if the claimant would prefer to have the cash equivalent of her loss as a beneficiary, then she will prefer to have a charge or a lien over the entire mixture of property

there are 2 types of proprietary remedies:

i. declaration of trust

entitles the claimant to an equitable proprietary interest in the traced property

trustee/third party with legal title in the traced property would hold the equitable interest in that property on trust for the claimant/and himself (if he is innocent party)

in doing so, the claimant/and innocent party will become the beneficial owner of the property, and they can acquire any future increase in value in that property

likely to be sought in which circumstances in which the property is intrinsically valuable or when it is likely to be of use to the claimant

award of proprietary rights in the form of a express trust/constructive trust over the property in favour of the claimant

express trust - if the trustee misappropriated the asset to buy something for himself/save it in his bank account, the trustee will hold that asset on trust for B

constructive trust - if the trustee misappropriated the asset and gave/sold it to third party, the trustee will hold that asset on trust Buddy

ii. imposition of equitable charges/lien

Both of these types of remedy are therefore concerned with ensuring that the claimant is paid an amount of money and both require that the property can be identified separately from other property.

charge - entitles the claimant to seek a court order to seize the property and to sell it if the defendant does not pay the claimant whatever the claimant is owed under the terms of the charge

lien - entitles the claimant to take possession of property and to retain that property until the defendant pays the claimant whatever the claimant is owed - if payment is not so made then the claimant will petition the court for seizure of the property

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Potential restrictions that can prevent/limit B from using the equitable rules of tracing to trace the asset/value of asset

1. Dissipation of the asset or fund

2. Lowest intermediate balance rule

if trust asset is mixed into a bank account and withdrawals are made, but the funds are depleted - the balance of the bank account is at a level below the value of the original trust assets (not only apply on mixing of bank accounts, but also mixing of other types of trust assets eg. golds)

B's claim is going to be limited to the lowest account balance between the time of misappropriation and mixing & the time of the claim

leading case: Roscoe v Winder

FACT: D misappropriated £450k of C's company's money. It ended up in a mixed account which money was withdrawn from, making a balance of only £25

HELD: B was only able to claim and trace assets to that £25 only

exception: unless it is very clear factually from T's behaviour that T was intending to replenish the misappropriated trust asset for B

3. Backwards tracing

if trust asset is used to pay off a loan/overdraft, that has already been used to purchase something tangible

the orthodox view is B cannot backward trace his asset into a purchase that has already been made - because strictly speaking, the beneficiary’s property has been dissipated: it has been used to extinguish a liability.

However, backward tracing allows the beneficiary to claim the asset acquired by the fraudster with the loan money.

the court in Bishopgate v Woman (CA) thought that backward tracing could be possible if there was a clear enough link between the payment of the money into the account and the previous purchase of the property (to repay the loan/cover the overdraft)

Backward tracing is 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

Federal Republic of Brazil v Durant

FACT: Two BVI companies, controlled by the former Mayor of Sao Paolo and his son, has taken various bribes and laundered those bribes by passing it illegally to various different accounts. The laundered money was paid into an account in New York, from which payments were made into D's account in Jersey. C wants to trace the claim to the Jersey account, but there was a time mismatch/delay between the time Jersey account being credited and NY account being debited.

HELD: It was plain on the facts that the payments between all accounts were all part of the same transaction. This transactional link was sufficient to permit backward tracing, meaning the BVI companies’ liability extended to the full amount of the Bribe Proceeds.

Lord Toulson supported the position taken in Bishopgate - he gave the leading judgment: "where there is a close causal and transactional link between the incurring of the debt and the use of the trust fund to discharge it"

rather than the specific ordering of the events, the court was very much focused on the substance of what was going on

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.

NOTE: the Privy Council’s decision is not binding as a matter of English law, it is persuasive and provides an indication of how the Supreme Court may decide the issue in the future.

4. Tracing into improvements to property

if D misappropriated the trust fund and spent it on work improving her house (which will presumably increase the value)

if D is a wrongdoing trustee, B can charge the property and assert his possessor charge against that property - B will be guaranteed for the value of the original trust asset and its interest

if D is an innocent party (T misappropriated trust fund and gave it to a third party), B will have no claim