Constructive Trusts

Introduction
• As a general principle, it may be said that property subject to a constructive
trust must have come into the hands of the alleged trustee as a result of
unconscionable dealing or in breach of a fiduciary obligation.
• The award of a constructive trust usually involves the court ordering the
defendant to hold property to which he has title on trust for the claimant, but
in some situations the constructive trust is awarded as a personal remedy;
the defendant is held accountable as if he were a trustee.
• Someone who knowingly assists a trustee or other fiduciary to commit a
breach of duty will be accountable as a constructive trustee and must
account to the beneficiary for loss caused by the breach.
• The constructive trust is an ‘as if’ trust – the defendant is treated by equity as
if he were an express trustee, even though he is not.
The constructive trust compared with the
express trust
• The essential difference between an express trust and a
constructive trust is that an express trust is created by the act of a
settlor, who manifests an intention to create a trust, whereas a
constructive trust is imposed by operation of law.
• Intention is not irrelevant to the imposition of a constructive trust
(indeed one type of constructive trust is termed a ‘common
intention’ constructive trust) but the source of the obligations
imposed on the trustee is the court order, not the intention or
expectations of a settlor.
The constructive trust compared with the
resulting trust
• A resulting trust arises when a provider of property does not intend
the recipient to obtain beneficial title to the property; the trust
arises upon proof of the provider’s absence of intention to benefit
the recipient.
• The trust arises because it would be unconscientious for the legal
owner of the property to assert full beneficial title.
• Intentions may be relevant to determining whether the recipient
acted unconscionably, but inquiry will be directed to the
conscience of the recipient in determining the imposition of
constructive trusteeship.
Constructive trusts- general principles
• A constructive trust will be imposed whenever equity considers it
unconscionable for the party holding title to the property in
question to deny the interest claimed by another.
• In Muschinski v Dodds (1985) 160 CLR 583, 615 Deane J stated
that the constructive trust is not ‘a medium for the indulgence of
idiosyncratic notions of fairness and justice’.
• A constructive trust will not be imposed simply because to do so
would be fair or just to the plaintiff meaning that a claimant must
bring her claim within a recognised category of constructive
trusteeship.
Constructive trusts- general principles
• For example, where a defendant is a fiduciary who has obtained
property for himself while under a duty to obtain it for the
claimant, the claimant will be entitled to the benefit of a
constructive trust over the property or its traceable proceeds.
• This is because the misappropriation of property by fiduciaries is a
recognised category of constructive trusteeship, constructive
trusts principles are (institutional) category-based, however in
American law a constructive trust is created through a court's
power, over assets the court determines a party cannot equitably
keep, remedial-based.
What is an institutional constructive trust?
• A trust that arises through operation of law, regardless of the parties'
intentions, where it would be unconscionable to allow a legal owner to
retain beneficial ownership of property.
• Under an institutional constructive trust, the trust arises by operation
of law as from the date of the circumstances which make the property
owner liable to the constructive trust over his property: the function of
the court is merely to declare that such trust has arisen in the past.
• The consequences that flow from such a trust having arisen (including
the possible disadvantageous consequences to third parties who in the
interim have received the trust property) are also determined by settled
principles, not under a discretion.
See Westdeutsche Landesbank Girozentrale v Islington London Borough
Council [1996] AC 669 at 714–715,
What is a remedial constructive trust?
• A constructive trust may have remedial effect; however, equity law
does not recognise the concept of a discretionary "remedial
constructive trust" as a proprietary remedy for unjust enrichment or
when the court considers it just (paragraph 47, FHR European Ventures
LLP and others v Cedar Capital Partners LLC [2014] UKSC 45).
• The court first determines the question of liability and then considers
what is the appropriate remedy, the remedial constructive trust being
regarded as a judicial remedy giving rise to an enforceable obligation:
the extent to which it operates retrospectively to the prejudice of third
parties lies in the discretion of the court.
• It depends for its very existence on an order of the court, such order
being creative rather than simply confirmatory.
Constructive trusts and unjust enrichment
• It is sometimes suggested that the categories of constructive
trusteeship rest on broad principles which have replaced the specific
categories of constructive trusteeship.
• In the USA, for example, the first Restatement of Restitution provided
that the constructive trust is a remedy for unjust enrichment.
• But equity law has never accepted unjust enrichment as the basis of
the law of constructive trusts.
• There may be cases where the practical effect of imposing a
constructive trust is to restore property to a claimant of which she has
been unjustly deprived by the defendant and here it looks like as a
restitutionary remedy.
• But most applications of the constructive trust have nothing to do with
reversal of unjust enrichment.
Constructive trusts and unconscionability
• Another suggested basis of the constructive trust is the prevention of
unconscionable, or unconscientious, conduct.
• Equity, it is said, imposes a constructive trust where it would be
unconscionable for a legal owner of property to deny the claimant an
equitable interest.
• This proposition is correct at a high level of generality.
• But ‘unconscionability’ in this context has a reasonably settled meaning: it
applies where a claimant’s reasonable expectation of acquiring an interest in
property has been defeated by the defendant’s conduct.
• But the plaintiff can nonetheless establish her claim to a constructive trust
without proving the defendant’s moral turpitude; even a well-intentioned
fiduciary can be held accountable as a constructive trustee: Boardman v
Phipps [1967] 2 AC 46
Constructive trusts and wrongdoing
• A constructive trust is not always a remedy for the commission of a
wrong.
• Some constructive trusts are undoubtedly remedies for wrongdoing
(the constructive trust imposed over property obtained by a fiduciary in
breach of a duty owed to the beneficiary is again an example), but in
other cases the constructive trust is imposed independently of any
misconduct on the part of the defendant.
• Constructive trusts achieve a variety of remedial aims including the
enforcement of a claimant’s reasonable expectations, the protection of
reliance expenditure, the reversal of unjust enrichment, the prevention
of gain by the commission of wrongdoing and the perfection of legally
incomplete transactions
Obligation to account as a constructive trustee for
profits received by virtue of his position as trustee
• Various cases may be mentioned to illustrate the wide principle, continually
restated, that ‘whenever a trustee, being the ostensible owner of property,
acquires any benefit as the owner of that property, that benefit cannot be
retained by himself, but must be surrendered for the advantage of those who
are beneficially interested’: Per Lord Cairns LC in Aberdeen Town Council v
Aberdeen University (1877) 2 App Cas 544, 549, HL.
• The object of the equitable remedies of account or the imposition of a
constructive trust is to ensure that the defaulting fiduciary does not retain the
profit; it is not to compensate the beneficiary for any loss.
• It does not depend on whether the beneficiaries actually suffered any loss.
• The strict rule requires a trustee or fiduciary to disgorge all of the profits that
he has made from the transaction that has involved the breach of duty
Bribes or secret commissions by agents
• The 1890 English Court of Appeal decision in Lister & Co Ltd v
Stubbs (1890) 45 Ch D 1 declared that an agent who receives a
profit in breach of fiduciary duty other than by use of the
principal’s property holds that profit as a debtor, not as a
constructive trustee for the principal.
• This view was premised on the view that the principal lacks any
proprietary interest in the gain made by an agent because it was
never the principal’s property.
Later case on bribes
• Not until 1994 when the Privy Council in Attorney- General (Hong Kong) v Reid
[1994] 1 AC 324 characterised Lister v Stubbs as inconsistent with the
principle that a fiduciary must not be allowed to benefit from a breach of
fiduciary duty, Lister v Stubbs seemed consigned to history.
• Their Lordships proffered the following conclusion (Attorney- General (Hong
Kong) v Reid [1994] 1 AC 324) at 331– 332:
When a bribe is accepted by a fiduciary in breach of his duty then he holds that
bribe in trust for the person to whom the duty was owed. If the property
representing the bribe decreases in value the fiduciary must pay the difference
between that value and the initial amount of the bribe because he should not
have accepted the bribe or incurred the risk of loss. If the property increases in
value, the fiduciary is not entitled to any surplus in excess of the initial value of
the bribe because he is not allowed by any means to make a profit out of a
breach of duty.
Later case on bribes
• Only a few years later the approach was rejected, in favour of Lister, both at first
instance and on appeal, in Sinclair Investments (UK) Ltd v Versailles Trade Finance
Ltd, Lord Neuberger MR, beyond citing potentially unfairness to creditor interests of
proprietary relief, maintained that Reid was unsound, reasoning as follows:
In cases where a fiduciary takes for himself an asset which, if he
chose to take, he was under a duty to take for the beneficiary, it is
easy to see why the asset should be treated as the property of the
beneficiary. However, a bribe paid to a fiduciary could not
possibly be said to be an asset which the fiduciary was under a
duty to take for the beneficiary. There can thus be said to be a
fundamental distinction between (i) a fiduciary enriching himself
by depriving a claimant of anasset and (ii) a fiduciary enriching
himself by doing a wrong to the claimant.
Final battle over secret commissions???
• There remained judicial murmurings against the legitimacy of such an
outcome, and continuing debate in academic circles both for and
against it.
• The issue finally saw resolution in 2014 in FHR European Ventures LLP
v Cedar Capital Partners LLC [2015] AC 250.
• Lord Neuberger, who delivered the reasons of the Supreme Court,
reviewed the case law and found it impossible to identify any plainly
right or plainly wrong answer to the issue “as a matter of pure legal
authority”.
• Accordingly, resolving the issue rested on matters of principle and
practicality, which pursuant to a charge of heart were held to ultimately
favour the Reid approach.
Accountability of persons who act as trustees
without appointment
• The relevant principle is that “if one, not being a trustee and not
having authority from a trustee, takes upon himself to intermeddle
with trust matters or to do acts characteristic of the office of
trustee, he may thereby make himself what is called in law a
trustee of his own wrong — ie a trustee de son tort”: Mara v
Browne [1896] 1 Ch 199 at 209 per Smith LJ. See also Barnes v
Addy (1874) LR 9 Ch App 244 at 251 per Lord Selborne
• This liability is effected through the vehicle of constructive
trusteeship; the trustee de son tort, having assumed the office of
trustee and its responsibilities, is deemed to be a (constructive)
trustee.
Trustee de son tort
• A trustee de son tort need not, and often does not, have title to the trust
property, the reference to constructive trusteeship is not to be
understood as entitling the beneficiaries to a proprietary claim, but as a
means of securing personal liability to provide compensation for loss
(usually where the actual trustee lacks funds to do so).
• This explains why the constructive trusteeship is justified only where
the stranger was so far in control of the trust property, like an express
trustee, as to have been capable of disposing of it in any way, in which
case imposing liability equivalent to that of an express trustee is
warranted:Re Barney [1892] 2 Ch 265; Selangor United Rubber Estates
Ltd v Craddock (No 3) [1968] 2 All ER 1073 at 1095
Trustee de son tort
• This category covers a person who mistakenly or out of sheer
officiousness intermeddles with trust property by administering it
as if he or she were a trustee.
• Trusteeship de son tort may, for instance, arise in respect of
agents of a trustee who deal with the trust property inconsistently
with known terms of the trust.
• This scenario illustrates the overlap between trusteeship de son
tort and recipient liability or accessory liability .
• But unlike recipient or accessory liability, that a trustee de son tort
acted honestly does not preclude liability; liability is strict.
Liability as an “accessory” to a fiduciary or
trust breach
• In its classic formulation, that of Lord Selborne LC in Barnes v
Addy (1874) LR 9 Ch App 244 at 252 a person becomes subject to
what has been termed “accessory liability” if he or she, without
any applicable existing fiduciary duty in the circumstances,
assists the trustees “with knowledge in a dishonest and
fraudulent design on the part of the trustees”.
• It has been noted that “whether a third party has assisted is a
question of fact and, in practical terms, the ways in which a third
party may provide assistance are myriad”: Harstedt Pty Ltd v
Tomanek [2018] VSCA 84 at [116].
Liability as an “accessory” to a fiduciary or
trust breach
• The court nonetheless identified two principles to assist: first,
“there will be assistance where, but for the action or inaction of
the third party, the breach of fiduciary duty would not have
occurred” (at [117]); second, “there may also be assistance where
the third party has facilitated a breach of fiduciary duty that would
have occurred in any event” (at [118]).
• Although originally couched by reference to trustees, the doctrine
has subsequently been applied more generally to breaches of
fiduciary duty, whether or not by trustees proper: Royal Brunei
Airlines Sdn Bhd v Tan [1995] 2 AC 378
Liability as an “accessory”: knowledge
• On the traditional formulation, what attracts liability in that person (the
“accessory”) is her or his knowledge of the trustees’ “dishonest and
fraudulent design”.
• In what ostensibly remains the leading case on the point in Australian
law, Consul Development Pty Ltd v DPC Estates Pty Ltd(1975) 132 CLR
373 their Honours therefore focused on the level of knowledge
sufficient to attract this liability.
• In an attempt to avoid detailed inquiry into levels of knowledge, the
Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at
386– 387 redirected the relevant inquiry, and the touchstone for the
accessory’s liability, to one grounded solely in whether or not the
accessory had behaved dishonestly.
Object and nature of relief
• Whatever approach is adopted, the object is the same: to make
the accessory liable as a constructive trustee for any resultant
losses, and accountable as a constructive trustee for resultant
gains, to the relevant fund.
• Affording a remedy against the accessory serves both to make
good the beneficiaries’ loss should the trustee lack financial
means, and to impose a liability that will discourage others from
behaving in a similar fashion: Royal Brunei Airlines Sdn Bhd v Tan
[1995] 2 AC 378 at 386– 387
Object and nature of relief
• Constructive trusteeship in this form can, for instance, pierce the
corporate veil to make a company officer liable for losses incurred
by the company in breach of its trust or fiduciary duty: Royal
Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378

• It may also make persons accountable for gains derived from the
exploitation of a corporate business opportunity secured in
breach of fiduciary duty, or attach liability to others, bankers for
instance, who act for trustees or other fiduciaries.
Object and nature of relief: Banks
• The prospect of the latter may place banks in a difficult position, given
their contractual obligation to act in accordance with their customers’
instructions, but at the same time their obligation in equity not to be an
accessory to a fiduciary breach.
• In dealing with these conflicting duties, it has been said that equity will
provide a bank a defence and restrain enforcement of the contractual
cause of action “only if performance of the mandate would actually,
rather than potentially, render the bank liable for the equitable wrong of
dishonest assistance”: Westpac New Zealand Ltd v MAP & Associates
Ltd [2011] 3 NZLR 751 at [14] per Tipping J
• In the case the bank was held liable to its customer for breach of
contract where it could not show that any breach of trust would
actually have occurred had it followed its customer’s instructions
Object and nature of relief
• In the common case, the accessory does not actually receive identifiable trust
property — he or she assists or induces the fiduciary breach but the money is
directed other than to the accessory or is otherwise dissipated.
• In this event, to say that the accessory becomes a constructive trustee cannot be to
impose on her or him the obligation to hold property for the benefit of another, as
there is no property over which the trust is imposed.
• Rather, constructive trusteeship is a vehicle to render the accessory liable, usually
for a loss to the relevant fund (although case law acknowledges that the accessory
liability scenario can trigger a liability to account for a profit secured thereby),[OJSC
Oil Company Yugraneft v Abramovich [2008] EWHC 2613 (Comm) at [377], [392] per
Christopher Clarke J]; as if he or she were an express trustee, that is, personal
liability to compensate (or, in the case of a profit, account to) the principal (or
beneficiaries of the fund): [1996] AC 669 at 705 per LordWestdeutsche Landesbank
Girozentrale v Islington London Borough Council Browne- Wilkinson , who noted
therefore that the requirement of identifiable trust property does not apply to a
“trust” in this context because the accessory receives no identifiable trust property.
Object and nature of relief
• The terminology “accessory” liability is also prone to mislead.
Liability to account as a constructive trustee (or in equity) is
imposed directly upon the assistant; the reference to
“accessorial” liability does no more than recognise that the
assistant’s liability rests on “establishing, among other things, that
there has been a breach of fiduciary duty by another”: Michael
Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427 at [106] per
Gummow ACJ, Hayne, Crennan and Bell JJ
• What ensues is that the relief awarded against a defaulting
fiduciary and a knowing assistant need not coincide, whether in
nature or quantum.
Fault element — “dishonesty” in the
accessory?
• As an accessory owes no fiduciary duties to the principal or
beneficiaries, an element of fault on her or his behalf is required to
attract the intervention of equity: Royal Brunei Airlines Sdn Bhd v
Tan [1995] 2 AC 378 at 387
• Before reaching this conclusion, Lord Nicholls considered and
rejected the two extremes, namely no liability (rejected because
the loss would not be made good and it would not deter others
from behaving in a similar fashion: at 386– 387) and strict liability
(rejected because “everyday business would become impossible
if third parties were to be held liable for unknowingly interfering
with the due performance of such personal obligations”: at 387.
Royal Brunei Airlines Sdn Bhd v Tan [1995] 2
AC 378
• In Royal Brunei the respondent (T) was the managing director of,
and the principal shareholder in, a travel company (BL). BL
contracted to act as the appellant’s (RBA’s) travel agent for the
sale of passenger and cargo transportation.
• All money received by BL in its capacity as agent was to be held on
trust. Contrary to the agency agreement, T arranged for this money
to be paid into BL’s ordinary current account and used for BL’s
ordinary business purposes. As a result BL fell into arrears to RBA,
which then issued proceedings.
Fault element — “dishonesty” in the
accessory?
• The Privy Council advised that, in causing or permitting BL to apply
the money in a way he knew was not authorised by the trust of
which BL was trustee, T’s conduct was dishonest.
• Hence, he was personally liable as a constructive trustee for any
loss.
• His Lordship eschewed unconscionable conduct as the test for
liability, reasoning that “unconscionable” is not a term in everyday
use by non- lawyers and that, in the context of accessory liability,
it was unclear what the term could add to “dishonesty”.
• In the course of his speech Lord Nicholls made the following
observations regarding the criterion of “dishonesty”
Dishonesty
• [A] cting dishonestly, or with a lack of probity, which is synonymous,
means simply not acting as an honest person would in the
circumstances. This is an objective standard … [Any] subjective
characteristics of honesty do not mean that individuals are free to set
their own standards of honesty in particular circumstances. The
standard of what constitutes honest conduct is not subjective. Honesty
is not an optional scale, with higher or lower values according to the
moral standards of each individual. If a person knowingly appropriates
another’s property, he will not escape a finding of dishonesty simply
because he sees nothing wrong in such behaviour. In most situations
there is little difficulty in identifying how an honest person would
behave.
Dishonesty
• Honest persons do not intentionally deceive others to their
detriment. Honest people do not knowingly take others’ property.
Unless there is a very good and compelling reason, an honest
person does not participate in a transaction if he knows it involves
a misapplication of trust assets to the detriment of the
beneficiaries. Nor does an honest person in such a case
deliberately close his eyes and ears, or deliberately not ask
questions, lest he learn something he would rather not know, and
then proceed regardless.
Fault element — “knowledge” in the
accessory?
• Prior to the decision in Royal Brunei, English courts had refined levels
of knowledge down to a five- point scale (the Baden scale):(1) actual
knowledge; (2) wilful shutting the eyes to the obvious; (3) wilful and
reckless failure to make inquiries that an honest and reasonable
person would make; (4) knowledge of circumstances that would
indicate the facts to an honest and reasonable person (akin to
“constructive knowledge”); and (5) constructive notice (Baden v
Societe Generale pour Favoriser le Developpement du Commerce et de
L’Industrie en France SA [1992] 4 All ER 161 at 235– 238 per Peter
Gibson J).
• The Royal Brunei focus on the accessory’s state of mind thus clearly
aligns with equitable principle and is rightly an investigation that should
be independent of the state of mind of the defaulting trustee or
fiduciary.
Fault element — “knowledge” in the
accessory?
• Focusing on the accessory’s knowledge of the nature of the
trustee’s design seems to be directed at either the wrong inquiry,
or at a round- about way of approaching the Royal Brunei inquiry.
• Challenges in distinguishing between levels of knowledge
influenced the Privy Council in Royal Brunei (re)directing the
inquiry to the accessory’s honesty (or otherwise). Eager to avoid
refinements on knowledge, Lord Nicholls said that the word
“knowingly” was better avoided as a defining ingredient, and that
the Baden scale was “best forgotten”.
• Dishonesty, according to his Lordship, should be viewed as both a
necessary and a sufficient ingredient of accessory liability.
Fault element — “knowledge” in the
accessory?
• Although Lord Nicholls’ approach ostensibly simplifies the
relevant inquiry it may nonetheless be queried exactly how
divorced the test of dishonesty can become from inquiry into
knowledge.
• In giving colour to the concept of dishonesty, Lord Nicholls noted
that an honest person “would have regard to the circumstances
known to him [or her]” and that “when called upon to decide
whether a person was acting honestly, a court will look at all the
circumstances known to [her or him] at the time”.
Accountability as a recipient of trust property:
Elements of liability and nature of relief
• A person who receives property in her or his own capacity,
knowing that its transfer is in breach of trust or, it seems clear, in
breach of fiduciary duty will be made a constructive trustee of that
property for the benefit of the principal.
• As the person receiving the property does not otherwise owe
fiduciary duties to the principal, knowledge is what triggers the
fault element that affects her or his conscience
• It follows that receipt of property without the requisite knowledge
attracts no such liability, which ensues, however, upon acquisition
of that knowledge whilst holding the property or its traceable
proceeds.
Elements of liability and nature of relief
• “Receipt” for this purpose means receipt in the recipient’s own name
or for the recipient’s own benefit. Agip (Africa) Ltd v Jackson [1990] Ch
265 at 291 per Millett J [affd Agip (Africa) Ltd v Jackson [1991] Ch 547];
• At a minimum it involves taking “the trust property into one’s
possession”, possession not implying any form of ownership, but only
physical control: Gold v Primary Developments Ltd (1998) 152 DLR
(4th) 385 at 405 per Sopinka J.
• It does not include receipt as an agent, as in the case of a banker for a
customer or a solicitor for a client, even if it involves a breach of trust
by the principal but an agent who acts outside the scope of the agency
and misappropriates trust property may be liable.
Elements of liability and nature of relief
• For this purpose, as in others, “trust property” includes tangible property or
funds, and even intangible property, say, in the form of a chose in action, but
not something that falls outside what the law conceives as property, such as
confidential information or opportunity by virtue of a breach of fiduciary duty.
• It should not be assumed, in cases where the elements of recipient liability
are fulfilled, that constructive trusteeship will always generate a proprietary
consequence.
• If the recipient still holds the property, there is likely to be good reason to
make her or him a trustee of the property, although the position may be
otherwise if the property has decreased in value or the claimant is content
with a monetary award.
• In this event, again the recipient is treated as if he or she were an express
trustee, and thus liable to compensate the plaintiff for losses suffered as a
consequence of the recipient’s conduct,147 or to account for profits derived
from the impugned conduct
Requisite knowledge
• Megarry VC phrased it in terms of “whether the conscience of the
recipient is sufficiently affected to justify the imposition of such a
trust”: Re Montagu’s Settlement Trusts [1987] Ch 264 at 285.
• Building on this, Nourse LJ in Bank of Credit and Commerce
International (Overseas) Ltd v Akindele favoured a single test: that “the
recipient’s state of knowledge should be such as to make it
unconscionable for him to retain the benefit of the receipt”: Bank of
Credit and Commerce International (Overseas) Ltd v Akindele [2001]
Ch 437 at 455
• Although the single unconscionability test has been welcomed by
some as providing greater flexibility than one based on levels of
knowledge, it hardly avoids inquiry into the recipient’s knowledge.
Following and Tracing
• Suppose a trustee (T), now bankrupt so that any remedy against
him would be inadequate, in breach of trust had transferred an
asset of the trust to X, who has transferred it to Y.
• The beneficiaries (B) can follow the asset through X into the hands
of Y, assert their equitable title, and call on Y to restore the asset
to the trust.
• B will normally succeed in their claim unless Y can show that
either he or X was a bona fide purchaser for value of the asset
without notice of the trust.
Following and Tracing
• Alternatively, suppose that X was a purchaser for value without
notice of the trust and had given T a cheque for its full value, which
he paid into a new account in his own name.
• Suppose, further, that the account has been exhausted in the
purchase by T of shares in his own name, which he continues to
hold.
• B can trace the original asset into the account and out of the
account into the shares.
Following and Tracing
• Lord Millett in Foskett v McKeown [2001] 1 AC 102, [2000] 3 All ER
97 said, in relation to beneficiaries under a trust, that following
and tracing:
…are both exercises in locating assets which are or may be taken to
represent an asset belonging to the [claimants] and to which they
assert ownership. The processes of following and tracing are,
however, distinct. Following is the process of following the same
asset as it moves from hand to hand. Tracing is the process of
identifying a new asset as the substitute for the old.
Tracing
• Lord Millett explained the law of tracing as follows:
The transmission of a claimant’s property rights from one asset to its
traceable proceeds is part of our law of property, not of the law of unjust
enrichment. There is no ‘unjust factor’ to justify restitution (unless ‘want
of title’ be one, which makes the point). The claimant succeeds if at all by
virtue of his own title, not to reverse unjust enrichment. Property rights
are determined by fixed rules and settled principles. They are not
discretionary. They do not depend upon ideas of what is ‘fair, just and
reasonable’. Such concepts, which in reality mask decisions of legal
policy, have no place in the law of property.
A beneficiary of a trust is entitled to a continuing beneficial interest not
merely in the trust property but in its traceable proceeds also, and his
interest binds everyone who takes the property or its traceable proceeds
except a bona fi de purchaser for value without notice.
Tracing
• Lord Millett further stated that tracing is neither a claim nor a remedy.
• After the process is complete, the beneficiaries may be able to make a
claim.
• Where a beneficiary can follow a trust asset into the hands of a third
party, without the intervention of a bona fi de purchaser for value
without notice, he can assert his equitable proprietary interest and
require the asset to be restored to the trust.
• Where one asset is exchanged for another, a claimant can elect
whether to follow the original asset into the hands of the new owner or
to trace its value into the new asset in the hands of the original owner,
although he cannot, of course, recover twice.
Following at Common Law
• At common law, the legal owner of an asset who is deprived of its
possession has a right to follow it no matter into whose hands it
might come, notwithstanding that it may change its form, so long
as the means of identifying the asset in its original or converted
form continue to exist.
• The right is not restricted to tangible assets, such as the
sovereigns in a bag or a strong box referred to in the older cases,
but applies equally to a chose in action, such as a banker’s debt
to his customer
Following at Common Law
• In Lipkin Gorman (a fi rm) v Karpnale Ltd,13 Cass, one of the partners in a firm
of solicitors, had withdrawn some £223,000 from the firm’s client account
and lost it in gambling at the Playboy Club, owned and operated by the
defendant.
• Cass himself had been convicted of theft , and was presumably not worth
suing.
• It was held that the claimant solicitors could [trace] their original property, a
chose in action that is a debt owed to them by the bank, into its product, cash
drawn from their client account at the bank, and thence follow it into the
hands of the defendant.
• The defendant, the recipient of the stolen money traced into his hands, albeit
innocent, was further held, under the law of restitution, obliged to pay an
equivalent sum to the true owner where he had not given full consideration
for it and had thus been unjustly enriched at the expense of the true owner.
Following at Common Law
• One difficulty that may arise is as to the continued identification of the asset,
particularly if, at some stage of the chain of events, it has been converted into
money.
• Lord Goff , in Lipkin Gorman (a firm) v Karpnale Ltd, restated the rule that ‘at
common law, property in money, like other fungibles, is lost as such when it
is mixed with other money’, and it was mixing that caused the common law
claims to fail in Agip (Africa) Ltd v Jackson [1990] Ch 265 [1992] 4 All ER 385.
• With regard to physical mixtures, in Indian Oil Corpn Ltd v Greenstone
Shipping SA [1988] QB 345, [1988] 3 All ER 893 it was held that justice
required that, in a case of wrongful mixing of similar goods, the mixture
should be held in common and that each party should be entitled to receive
out of the bulk a quantity equal to that of his goods that went into the mixture,
any doubt as to that quantity being resolved in favour of the innocent party.
Tracing in Equity
• In Re Diplock’s Estate [1948] Ch 465, [1948] 2 All ER 318 Caleb Diplock,
who died in 1936, by his will directed his executors to apply his
residuary estate of over a quarter of a million pounds ‘for such
charitable institution or institutions or other charitable or benevolent
object or objects in England as my acting executors or executor may in
their or his absolute discretion select’.
• The executors had distributed over £200,000 among 139 charitable
institutions before the validity of this disposition was successfully
challenged by the next of kin.
• Having exhausted their primary remedy against the personal
representatives for their misapplication of the residuary estate, the
next of kin sought to recover the balance from the wrongly paid
charities, claiming alternatively in personam and in rem.
Tracing in Equity
• Th e general principle laid down in Re Diplock’s Estate is that
whenever there is an initial fiduciary relationship, the beneficial
owner of an equitable proprietary interest in property can follow or
trace it into the hands of anyone holding the property, except a
bona fide purchaser for value without notice, whose title is, as
usual, inviolable.