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Tracing Notes

GDL Law Notes > GDL Equity and Trusts Notes

This is an extract of our Tracing document, which we sell as part of our GDL Equity and Trusts Notes collection written by the top tier of Cambridge/Bpp/College Of Law students.

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Revision: Equity

[TRACING]

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Process by which property or assets substituted for it can be identified in the hands of recipients o

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Boscawen v Bajwa - per Lord Millett : 'Tracing is neither a claim nor a remedy but a process.

Two processes - following (identifying the same asset as it moves from person to person) and tracing (identifying a new asset as the substitute for the original

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Taylor v Plumer: client gave money to stockbroker Walsh to invest - he purchased bullion and investments and was caught making off to America - held that the client could claim the bullion and investments - on Walsh's bankruptcy, his assignees in bankruptcy sought to recover them from the D client - they failed o

Lord Ellenborough - 'it makes no difference in reason or law into what other form, different from the original, the change may have been made...for the product of or substitute for the original thing sill follows the nature of the thing itself, as long as it can be ascertained as such'

Remedies awarded as a result of tracing At Common Law

1. Proprietary remedy of restoration o

Historically - Common Law only provided action for specific recovery of land chattels - so only rarely has tracing led to a proprietary claim

o

One example :Taylor v Plumer - where the owner was himself able to recover his property by seizing itAnother - Jones (FC) & Sons v Jones

2. Personal remedy of restitution o

Most usual remedy at Common Law - personal claim vs. the recipient for the value of the property he has receivedIn the case of money - action will be for the 'money had and received' - per Millett J in Agip (Africa) Ltd v Jackson

In Equity

1. Equitable ownership (proprietary) 1

Revision: Equity

[TRACING]
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C recognised as the equitable owner of the property where the D held the original property and thus the substituted property on trust for the C - C can therefore claim the property itself or where money has been mixed - a proportion of it

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In more complicated cases - could be new trustees seeking to recover the trust property wrongfully given away to the old trustee : Young v Murphy

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Or a wrongdoing trustee trying to restore property to the trust: Montrose Investments Ltd v Orion Nominees Ltd

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Or a beneficiary under the trust seeking to recover the property to be held as part of a trust fund for himself if absolutely entitled on termination of the trust

2. Equitable charge or lien (proprietary) o

Charge imposed on the property which enables the C to recover the value of his money that went into the property, but not to claim ownership of the property itself where the property has depreciated in value

3. Subrogation (proprietary) o

Where the C money is used to discharge a secured debt, the C is allowed to 'stand in the shoes' of the creditor, and gain the benefit of the creditor's charge

4. Personal remedy

Advantages of a Proprietary Remedy: 'Most actions at law and in equity are personal' (Martin, Modern Equity)

1. Priority over general creditors on insolvency

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A personal claim is vs. the person rather than attaching to a particular asset in the D's hands - so relies on the D having sufficient funds to meet the claim o

If the D is insolvent - personal claimant will be an unsecured creditor - rank with the others pari passu-C will only receive a % of the sum he is awarded 2

Revision: Equity

[TRACING]

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Proprietary claim gives right to a particular property which never became part of the D's property
- so it will not go into the general pool to be shared amongst the creditors - equitable lien for a sum of money ensures that the claim for repayment can be met despite D's insolvency

2. Benefit from any increases in value of the property traced

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Claim to a particular property so entitled to any increase in the value of that property

3. No statutory limitation period

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Personal claim must be brought within 6 years - doesn't apply to proprietary remedy against a trustee within Limitation Act 1980 s21(1) - (although the equitable doctrine of laches may apply in a rare case)

Tracing at Common Law Limitations to tracing at common law

1. Claimant must have legal title

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Beneficiary under a trust cannot trace property and then claim it at law

2. Property must be identifiable

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CL views property as physical asset o

Can identify value in substitute provided it has not lost its identity

o

More difficult where property has changed form (substituted/exchanged or mixed with money)

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It is no objection where the property has been substituted - e.g. Taylor v Plumer (investments and bullion) or paid into separate bank account (Banque Belge pour L'Etranger v Hambrouck)Banque Belge - Hambrouck fraudulently obtained cheques from his employer

and paid them into his own bank account - C could trace and claim its money because it had at all times remained identifiable as no other sums had been paid into the account - it had not been mixed so identifiable throughout 3

Revision: Equity

[TRACING]FC Jones & Sons v Jones - hadn't been mixed : here Millett in CA said they

could reclaim not only the money, but also the profit made on it - emboldening common law tracing

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More difficult when mixing occurs: o

Some cases with tangible property have permitted tracing into the mixture - awarding claimants a proportion of the mixture as tenants in common : Indian Oil Co Ltd v Greenstone Shipping SA (Panama)

o

Money: Lipkin Gorman v Karpnale Ltd suggests that money can be traced into a bank account where it has been mixed with other money - but money cannot be traced through a mixed bank account - Agip (Africa) ltd v JacksonAgip :money couldn't be raced through the New York clearing bank system because it had become mixed with other money in the systemBUT - recent scholarship - Marsh v Keating : HL money could be traced in common law through mixed bank account

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Lords Steyn and Millett in Foskett v McKeown considered tracing a an evidential process where common law and equitable rules are the same - so law doesn't have to be strained to find fiduciary relationship in order to apply the liberal tracing rules

3. Tracing at common law usually only leads to a personal claim

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Inability to trace through mixed funds and the fact that common law historically only provided an action for specific recovery of land and not chattels - means that tracing at common law rarely leads to proprietary claims - generally only personal

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Chattels - process whereby owner seeks to identify his chattel in an action for conversion

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Money - unless actual coins/notes can be identified - C must use the action for money 'had and received' - C seeks to recover sum equivalent to that which the D received via a personal claim

4 Revision: Equity

[TRACING]

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Lipkin Gorman v Karpnale Ltd - Cass (partner in a law firm (A)) stole over PS300,000 from firm's client account - used to fund gambling addiction at the Playboy Club owned by respondent company (R) o

Bought chips at the Club: accepted that (R) acted in good faith and didn't know money was stolen - held (Gambling Act 1845) that R had given no valuable consideration so was an innocent volunteer

o

HL allowed (A)'s claim to the money : mixing of the stolen money in the hands of Cass did not defeat claim against R

o

HL: appellants had legal title - not to the money - but to the chose in action (debt owed by the bank to the appellants) - title of which could be traced into its product, i.e. money

o

D's knowledge is irrelevant - liability is not dependant on fault - but it is necessary to show the D was 'unjustly enriched': (ie that they gave no consideration for the money stolen by the thief from the C)

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The actions are personal so D is still liable to repay the value of the property he received even if he no longer has it (or has mixed it with his own) - Agip (Africa) Ltd v Jackson and Lipkin

The defence of change of position

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Lipkin Gorman v Karpnale - HL allowed (R) the defence of change of position o

(R) had acted in good faith - had paid sums to Cass representing his "winnings" at gambling

o

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Liability to (A) was reduced by the amount of Cass's winnings

Lord Goff - 'where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs he injustice of denying the plaintiff full restitution.'

Requirements for the change of position defence

1. Expenditure by the recipient in reliance on the payment received, so that recipient was 'disenriched'

2. Expenditure was extraordinary : wouldn't have occurred but for receipt of the claimant's funds Disenrichment in reliance on receipt or anticipated receipt 5

Revision: Equity

[TRACING]

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Dextra Bank & Trust Co Ltd v Bank of Jamaica - D who changed his position in reliance on an anticipated receipt can rely on defence

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Commerzbank AG v Gareth Price-Jones - D banker attempted to use change of position as a defence to an action by his employer bank for return of a bonus they had paid twice by mistake - he hadn't spent it yet but claimed that it had induced him not to seek higher remuneration elsewhere - CA didn't accept this as relevant change of position - but court kept open possibility that a relevant change of position could take place where no expenditure had occurred (Munby J : defence not restricted to cases of disenrichment)

Extraordinary expenditure

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Lord Goff in Lipkin Gorman v Karpnale - Wouldn't occur in the 'ordinary course of things'

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Scottish Equitable plc v Derby: CA held that payment of debts is usually not a change of position

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Assets bought and subsequently consumed DO NOT have to be extraordinary in themselves; Phillip Collins Ltd v Davis: used money to supplement everyday standard of living - the amount they had acquired and the expense incurred was extraordinary even though the assets were ordinary

Limitation to the defence

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Lord Goff in Lipkin - 'the defence is not open to one who has changed his position in bad faith ... the defence should not be open to a wrongdoer'

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E.g. if the D who had paid away the money with knowledge of the C's entitlement to restitution

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Moore-Bick J in Niru Battery Manufacturing Co v Milestone Trading (No 1) - no definition of bad faith but will depend on circumstances in which the payee parted with money and extent of knowledge'

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Mere negligence will not deprive a defendant of the defence

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Defence to unjust enrichment claims but NOT to proprietary claims where reliance has to be placed - if it can be - on the defence of bona fide purchaser of legal title without notice (doctrine of notice)

CONCLUSION - LIMITATIONS OF COMMON LAW

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