Lord Nicholls 1998
- Knowing assistance and reciept are more important than ever because trusts are now widely used commercially. Pension funds etc. Companies are at the heart of the business world, and the law treats application of funds by a director for improper purposes the same as a trustee. Commercial fraud has flourished in the last 20 years. Persons that money passed through or that held it were one target. Many concerned were innocent. The need for clarification is pressing. The law doesnt yet exhibit the degree of certainty that the business community is entitled to expect. No clear guidance from recent cases.
- Recipient liability- person liability of a third party who received and misapplied trust property. May have retained it or parted with it. The deprived beneficiary may have a proprietary remedy. Need consider recipients personal liability. Distinction is of particular importance when property has been dissipated or is no longer identifiable so that a proprietary remedy is not available.
- Tradtional approach of equity- in general the mere reciept of anothers property doesnt trigger personal liability. If they have the property or proceeds it must be returned. If not, he incurred no liability unless he has been at fault in some way. If he was at fault equity treats him as a trustee. Constructive trustee- two fold personal obligation. Needs to compensate trust and account for any benefit recieved. Several reasons for uncertainty. There are many different circumstances in which it can arise.
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Lord Nicholls 1998
- The types of conduct also range massively. Many variables and it is doubtful if one single principle can be devised to accommodate satisfactorily all aspects of the variants. Search for a universal principle may be too ambitious. Constructive trusteeship may be too harsh if applied widely. Courts have found it hard to define the fault required. Confusing terminology. There has also be insufficient analysis of the rationale of the principles under consideration.
- Fault free recipients- property rights endure. Estates or interests rank primarily in order of their creation. Equitys response to the endurance of property rights is to afford a proprietary remedy where property can be identified or its proceeds traced. Doesnt help if money has been spent on ordinary expenses. Shows that justice requires that, a person wrongfully deprived of property should have a personal right of recourse against a fault free recipient of a benefit to which he was not entitled. Suggests some form of personal liability is required but less severe than the liabilities of a trustee. The common law went to the other extreme. The remedy of damages for conversion lies in every recipient, regardless of if he bought the goods or got them for nothing. Same remedy is innocent or dishonest. Strictness has been ameliorated by the HoL in Lipkin Gorman. Change of position is now established as a defence to a restitutionary claim. Catalyst for a more rational structure. Restitutionary approach has been hailed as the way forward. In this respect equity should follow the law.
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Lord Nicholls 1998
- Personal liability would flow from having recieved the property of another, from having been unjustly enriched at the expense of another. Would be triggered by mere reciept and so recognises the endurance of property rights. Fairness would be ensured by the need to identify the gain and making changes of position as a defence. Restitutionary remedy would reverse what would otherwise be an unjust enrichment but not go beyond this.
- Recipient liability and the Diplock principle- in this case equity did impose personal liability even on the fault free charitable recipients. HoL affirmed the continuing existence of an equitable principle where those to whom a deceased estate has been erroneously distributed are personally liable to repay the persons rightfully entitled to the deceased property, whether as creditors or beneficiarys. This is strict liability. Applies even though recipients have spent the money. This is a strong decision and still represents the law. CoA said it was unconscionable to retain an unauthorised benefit. This is the notion of unjust enrichment.
- Careless recipient- uncertainty as to whether they are subject to the personal liabilities of a constructive trustee. If the restricted (Montagu) view is preferred theyre under no personal liability. On broader Karak view the careless recipient is subject to the onerous personal liability of a constructive trustee. Law is concerned with balancing competing interests. Factors relevant are the desirability of protection property interests, desirability of promoting...
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Lord Nicholls 1998
- the speedy transaction of business, the blameworthiness of being honest but careless, and the undesirability of placing liability on a recipient who paid for the property or changed position on good faith. Negligence to persue an inquiry hardly seems blameworthy enough to warrant personal liability. Modified Diplock principle is a good way forward. The restitutionary principle is concerned with unjust gain and restoring parties to their original position. In Lipkin Goff siad that the change of position defence would be available to a person whos position had so changed that it would be inequitable in all the circumstances to require him to make restitution.
- Dishonest recipients- must make good losses caused and account for profits recieved. Liability triggered by dishonesty and conduct which an honest person would consider dishonest. Holding property is one of the hallmarks of trusteeship but the dishonest assistants need recieve no property. Liability not confined to value of property recieved. A more direct approach is to view both as equitable wrongs. This can then invoke the principle that equity will not assist a wrongdoer.
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- Restitutionary rights are those which entitle a person to demand that another give up a gain. Virgo tells us that there is restitution for unjust enrichment, for wrongs and in vindication of property rights. In Lipkin the HoL affirmed the existence in English law of a cause of action in unjust enrichment. Virgo thinks this was a straight forward case of restitution in vindication of property rights. It is therefore to be said to 'have nothing to do with the principle of reversing the defendants unjust enrichment.'
- Support from the HoL- Fosketts most important proposition is the assertion that there is an absolute opposition between vindication of property rights and restitution of unjust enrichment. That is incorrect. In Foskett the HoL held that the beneficiaries under the trust were beneficially entitled to a proportionate share. Complicating factors- the death occured at a time when, even if the stolen premiums hadnt been paid, the amount of death benefit would not have been affected. Majority took the view that all five premiums had paid for entitlements under the policy and that all those entitlements had been realised in the death benefit. Minority said the stolen money wasnt traceable to the death benefit. The simply majority model is this- if someone steals £50k from a trust and buys a Jag, the tustees would be beneficially entitled to the car. Endorsement of the Virgo position- Browne Wilkinson said that 'the purchasers claim isnt in unjust enrichment, it is based on the assertion by the purchasers...
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- of their equitable proprietary interest in the identified property.' Hoffmann- 'this is not based upon unjust enrichment except in the most trivial sense of that expression. It is a vindication of a proprietary right.' The trivial sense is the sense in which the phrase can be used of any situation where something ought to be given up and is not being given up. Two false propositions- passages tend to suggest that a claim which falls in the law of property cannot fall within the law of unjust enrichment but also that property law is governed by fixed rules and the law of unjust enrichment by woolly ideas of fairness and justice. The latter is false. The law of unjust enrichment is as rule based as any other area. Also there is no absolute opposition between property and unjust enrichment, any more than there is between unjust enrichment and the law of obligations.
- No logical opposition- unjust enrichment is an event. The recipient of a mistaken payment is enriched at the expense of the payer in circumstances, even in the absense of a wrong or contract, he ought to make restitution. Property is not an event but is a response to an event. This distinction divides between those in rem, whose exigibility depends on the location of a thing and those in personam, which are rights exigible only against the person whom they originally arise.
- Empirical inquiry- it is an error of logic to force a choice between the law of property and the law of unjust enrichment.
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- Causative event in Foskett- use the simple facts where the beneficiaries are entitled to a Jag. The particular event- two steps have to be taken- must identify the causative event out of which the beneficial interest arises. Must proceed to ask if it is a species of unjust enrichment. Lord Hoffmann in Foskett seems to suggest the event to focus on was a physical mixture, which the Romans called a confusio (a physical mixture of two fluid substances in one vessel.) Contributors are co-owners of the mass. On the facts before the HoL there wasnt any confusio, just substitution. Browne Wilkinson takes a different approach- one which averts its eyes to substitution. In his view there is no new event at all. Claimants property right is directly attibutable to the consent based express trust from which money was stolen.
- Leech theory of behaviour of proprietary rights in and through substitutions. There is a right which detached from its original res and will wait to sink its head into a passing substitute. This will just not work. It would be fatal to the leech theory that the right brought down on the substitute is often different in content from the right in the original. The idea of a beneficial which can float independently of anything is incoherent. The notion that it can also mutate during the floating phase overstretches the power of the metaphor. These considerations suggest that we must see substitution of one asset for another as an independent substitutive event. Professor Grantham and Rickett do not agree.
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- They still reject the leech theory but commend the HoL for holding that the plaintiffs equitable proprietary rights in the traceable product arose in response to or by virtue of the rights held in the original trust money, and not unjust enrichment. This identifies the origin of the rights in the death benefit as the claimants rights in the trust money They achieve the necessary reconciliation by asserting that a proprietary right is in itself for the purpose an event. This will not do. A right which the law recognises in response to events cannot be an event in itself.
- The true causative event to focus on is the non consensual subsitution. The crucial question is whether the non consensual substitution is or is not a particular species of unjust enrichment. Non consensual substitution works its proprietary effects independently of the consent of any grantor. Substitution also works independently of wrong doing. Two cases show this: Lipkin and Trustee of FC Jones. The argument of treating subsitution as an instance of unjust enrichment is that if D uses money from a trust fund and buys the Jag, he can said to have enriched himself at the expense of the beneficaries. He has enriched himself a valuable chattel which he chose to obtain. The enrichment can be said to be at the beneficiaries expense, although the Jag was never theirs, nevertheless it was obtained using their money and is an unjust factor in the absense of their consent. The law does give it back by raising a new proprietary right in the substitute. Every claim that is in the form 'thats mine' is in property.
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- Common law has no direct assertion of a proprietary right. May sue in unjust enrichment, here I assert that you are under an obligation to pay me the value of the enrichment which you have obtained at my expense without my consent. It was a personal claim arising from unjust enrichment. On the chancery side, one can vindicate proprietary rights. One can ask for a declaration that the defendant holds such a thing on trust for oneself.
- Foskett: tracing- in relation to the tracable substitute of an asset, the law offers either a lien for the value, or a beneficial interest proportional to the input, it is for the claimant to choose.
- Smiths detailed work on tracing turns on a number of key propositions. 1) tracing value through substitutions must be distinguished from following a specific thing from hand to hand 2) both tracing and following as exercises in identification, are neutral as to rights, and therefore must be separated from the business of formulating a claim once the right has been found. Successful tracing doesnt establish a claim.
- After Foskett it is unlikely taht any of these propositions will be challenged again. Tracing is no more than a process of identification. Tracing comes in, as the rules handle the evidential impasses which are encountered as these complexities multiply. Rules of tracing tell us whether and to what extent an asset in D's hands is the traceable substitute for C's original asset. Tracing only tells us whether we are or are not looking at an asset which is wholly or partially a substitute for another.
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Davies and Virgo-
- Millett- '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 a substitute from the old.' The innocent claimant can choose which to do.
- Following- difficulties arise when assessing if the original asset still exists. They may become mixed. Finding a tenancy in common allows the original onwer to take back their original share. Hard to know when the product has changed irreparably or can be retrieved. Most commonly appropriated thing is money. Hard to find as has no earmark. Can trace.
- Tracing- Rimer- 'as the process by which a claimant seeks to show that an interest he had in an asset has become represented by an interest in a different asset.' Focused upon the value inherent in property. Millet- 'what he trace is not the physical asset itself but the value inherent in it.' Foskett is leading HoL authority. Browne Wilkinson focused on whether the various stages of the process are 'transactionally linked.' Lord Steyn thought the lack of causal link between death benefit and payment of the final payments was problematic for tracing. Lord Hope challenged that the pay out could be attributed to the 4th and 5th premiums. Minority (above) thought that the fact that the premiums paid with the beneficiaries money was not necessary for the death benefit pay out. The majority thought causation was irrelevant and thought in consideration of all the premiums.
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Davies and Virgo-
- Re Diplock- Green said 'the materialistic approach of common law, equity adopted a more metaphysical approach.' Equity allows tracing into a mixutre of money, whereas common law does not.
- Tracing at common law- when claimant has legal interest he will have to rely on the common law tracing rules that interest subsists in subsitute property held by the defendant. Cant trace into a mixture (established by orthodoxy.) Lord Millets reasoning in Agip suggests this is still good law. This inability is particularly unfortunate given modern day fraud. Agip makes it clear that it is impossible to trace at common law through electrons involved in bank transfers, the common law is unable to identify a legal proprietary interest in the money in the bank account. This drives many claims into the equitable arena. Problems would be greatly alleviated if there were to be only one set of rules. Some suggestion this fusion will happen in the future. There is influential obiter from the HoL in Foskett. However Foskett clearly involved an equitable interest and so issues of common law didnt arise. In Shalson Rimer- 'it cannot be said that Foskett has swept away the long recognised difference between common law and equitable tracing.' America and Canada have recognised common law tracing through a clearing system.
- Tracing at law doesnt require the property to stay in its original form. Can trace it through a bank account as long as there is no mixing.
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Davies and Virgo-
- Can trace in law into profits made from the original property so long as there is no mixing. Shown in Trustees of FC Jones. Was a chain of straight substitutions, it doesnt matter that the original money paid from the partnership bank account had nearly quintupled in value, the trustee in bankruptcy was entitled to claim this profit simply because it derived from the original money without being mixed with the wife's other money.
- Tracing in equity- often preferred as equity focus's not on the physical thing but on the metaphysical nature of propery. Equity can trace into a mixture, even when money is mixed. There are two disadvantages with the equitable system- 1) susceptible to the bona fide purchaser defence, which doesnt affect legal title. 2) orthodoxy demands that the property in which the claimant had an equitable interest must have passed to the defendant through the hands of a fiduciary in breach of duty.
- a) fiduciary requirement- satisfied where the property had been held by a trustee or any other type of fiduciary. The fiduciary through which it passed in breach of duty need not be the defendant himself. Re Diplock. The requirement of misappropriation of the property in order to trace is sensible, gives a reason for tracing to begin. Can pose difficulties. In Agip Millet said the law needs to be reconsidered. People make artificial claims of fiduciary duty to allow the claim so the requirement doesnt make sense. If all that is required is the beneficial interest...
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Davies and Virgo-
- and legal are divided then the fiduciary requirement adds nothing and will always be satisfied on an equitable property base. This would be welcome.
- b) unmixed funds- tracing into unmixed funds in equity is relatively straightforward. There has been no mixing- no one elses property can be identified. Money in the account can be attributed to the beneficiaries property interest.
- c) mixed funds- more problematic. Equitable rules differ depending on whose interests are present in the funds. 3 situations can be discerned: mixing the wrongdoers property with the innocent beneficiaries, mixing two or more innocent beneficiaries assets and mixing the wrong doers property with property belonging to two or more innocent beneficiaries. Equity has no qualms about tracing into a mixed fund.
- Mixing of the wrongdoers property with that of the innocent beneficiary- mixed fund in the account. Beneficiary can trace into the account- value of his equitable interest can be found in the mixture. What if the trustee spends some on a new asset? Everything is presumed against the wrongdoer- the trustee. Particularly appropriate since the wrongdoing trustee has created the evidential difficulty in identifying whose property has been used to acquire the asset. Beneficiary can choose to trace his proprietary interest into an asset purchased or to insist that the asset was purchased with the trustees own money, depending on which is the most advantageous.
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Davies and Virgo-
- Hallet and Oatway work in tandem to protect an innocent beneficiary against a wrongdoing fiduciary.
- Mixing the beneficiaries money with that of another innocent party- Hallet and Oatway presumptions are inappropriate here. There is no policy reason to favour one over the other. The wrongdoer has no claim to any of the property and those who do have a claim are equally innocent. General rule is that the mixture belongs to the innocent parties in the proportions in which they contributed. Adopted by Parker in Sinclair. Although much of the reasoning in Sinclair has been departed from this analysis remains and was used by Green in Re Diplock. Treating the innocent parties equally is the fairest solution. What happens if money is used from the account. Claytons rule where the first payment into the account is presumed to be the first payment out of the account. This rule is obviously unfair. Both A and B should be able to trace into the property in equal shares. Approach used in CoA in Barlow Clowes. Only a presumption so often will be rebutted. The rolling charge method is preferred. Authority says that Claytons rule is starting point of analysis even if it rarely accords with justice.
- Mixing the wrongdoers money with that of two or more innocent parties- would be impossible for A and B to trace into the mixed fund and identify an equitable right in a third of the fund. If the fiduciary spends £100 to purchase and asset then A and B will have the opportunity...
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Davies and Virgo-
- ... to choose whether to trace into the acquired asset or to insist that the fiduciary spend his own money on the asset. A and B rank as equals, and between them the rolling charge analysis from Barlow applies.
- Limitations on tracing- a) dissipation- where the asset has dissipate then there will be no specific property into which the claimant can trace. Equity is helpless as is the common law. In the fund, which is spent on dinnner or holiday or something, equity which deals only in specific relief and not damages could do nothing. b) lowest intermediate balance rule- may place a limit on what a claimant can trace. If a trustee puts his own money in the account to top it up then the claimant is unable to trace into the extra top up since it clearly did not derive from the value in his original equitable interest. The amount which the claimant can trace dipped and from that point onwards the value of the claimants interest cannot increase. Roscoe is a good illustration of this rule. Last part is contraversial. When the trustee put more money in the account, the court rejected that it was trust money because it was not clear that that was what the trustee had intended. This appears to go against Hallets reasoning. c) tracing through debt- it is generally said to be impossible to trace through a debt. Maybe able to revive the debt through the remedy of subrogation. However the first rule is orthodox. Smith has suggested that you should be able to trace through a debt.
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Davies and Virgo-
- If tracing depends on being able to 'attribute' value in one asset to another this process could involve going backwards in time through a debt and attributing the value of the property used to discharge the debt as now subsisting in whatever was previously acquired through incurring that debt. There is some judicial support for this. There is no case in which backwards tracing has been explicitly accepted or rejected as part of a ratio. Congalen has argued that the law doesnt and shouldnt recognise backwards tracing. iv) swollen assets theory- if D spends money on something he wouldve had to pay anyway eg tax, then the D will be in a better position than if they hadnt had the money. It has been suggested that the claimant should be able to trace into the D's swollen assets, without having to identify a particular asset into which the value can be traced. Means D wont benefit and C is protected. Important if D becomes insolvent. Got the support of Templeman in Space Investments v Canadian Imperial Bank in Privy Council. Seems generous to claimant and so should be limited to personal claims. English law has refused the swollen assets theory and so did Bishopsgate v Homan. Theory has some academic support.
- Evans provides a sophisticated justification but must be rejected as it is inconsisten with case law and property principles. Foskett has made clear that tracing isnt based on causation and has nothing to do with unjust enrichment. Set out a clear and logical approach. Emphasised in Serious Fraud Office v Lexi Holdings.
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