The Breach of a Trust at Common Law and in Equity - Essay Example

?Tracing A trust may arise both by operation of law or in equity. In much the same way, the breach of a trust gives rise to remedies both at common law and in equity. The emphasis is more on equity as the most effective and complicated remedies arise there. One of the most effective remedies available to a beneficiary for a breach of trust, as a result of which the trust property has gone missing, lies in the proprietary remedy of tracing. Tracing is the process by which a wronged beneficiary ascertains his ownership right1 in trust property regardless of any changes that the said property may have undergone as a consequence of the breach. What this means is that, in equity, the remedy of tracing awards a proprietary right in the property to the beneficiary, so that he may be given priority in recovering it in case the defendant goes bankrupt, provided his property still exists and is distinguishable from the bankrupt individual’s other assets. This proprietary nature of the right was affirmed in Foskett v McKeown (2000). Tracing at law is much more restrictive as compared to tracing in equity as the beneficiary is not allowed to claim title to any additions in the value of the property that it may have acquired since the breach of trust and recovering the property may be close to impossible if it was mixed with another. In equity, tracing can lead to the property even if it is mixed and recover it for the wronged beneficiary, which allots great power in the hands of those who have been deprived. Moreover, the differences between tracing at law and equity are considered by some commentators as separate remedies altogether instead of limbs of the same principle. It is imperative to consider both regimes, and my discussion would reflect both the common law remedy and the remedy in equity. Tracing at Law At common law, any individual with a legal title in property may be able to resort to tracing in order to recover it. Thus, this legal title, may be traced all the way to the newest form the property has taken after exchanging hands (for e.g where a defendant has bought a watch with the original property, cash). This phenomenon was described as a matter of hardnosed property rights and distinguished from an action in damages2, hence, any identifiable property was considered traceable and returned to the original beneficiary. Thus, the legal title is traced from one person to all successive individuals that came along the way until finally reaching the person against whom the action could proceed, providing a means to the remedy (Trustee of the property of FC Jones v Jones [1996]). In this way, it is regarded by the courts not as a remedy unto itself but as a means to a remedy, as seen in Banque Belge pour L'Etranger v. Hambrouck [1921]3. The first step then to a successful tracing action is to identify the defendant who is now in possession of the property. In the above case, where money was being traced, the defendant was identified as the fraudulent cashier who had deposited the money in a bank and used it to pay for his expenses. It was held that the cash even though it had the potential of being mixed with other funds, was identifiable in the account and could be recovered by Banque Belge. Once the defendant is identified, the next step is to proceed with a remedy which could be one of the following depending on the form of property being traced. If the property in question, as in the above case of Hambrouck, pertains to funds, then an action to recover ‘money had and received’ may be brought (Lipkin Gorman v Karpnale [1991])4. In Karpnale, a compulsive gambler come partner of a law firm was eventually caught drawing money for gambling purposes from the company account. The money was traced to the gambling club which had exchanged it with chips. The House of Lords found that the money, although received in good faith, was recoverable by the solicitors from the gambling club which was presently in possession of it. There was also a failure of consideration observed at the hands of the gambling club as the chips did not command an ascertained value, and hence, since no consideration was provided, the solicitors were said to hold the better title to it and could recover. In deciding so, the court placed reliance on the House of Lords decision in Fibrosa Society Anonyme v Fairbairn Lawson Combe Barbour Ltd5 where, under a contract, money was paid by Fibrosa to the sellers of machinery and on non-delivery due to an outbreak of war, was allowed to recover the amount from the defendants. Thus, it follows, that the courts are more inclined at common law to remunerate the appellant in cases of unjust enrichment, as per Lord Wright’s speech at 616: It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep. If the property in question when tracing is a specific item, then the victim can seek to apply for remedy in the law of tort for wrongful interference with goods or an action in conversion. When dealing with items, the appellant can either seek damages for the value of the item or apply for specific performance where the courts, to their discretion, may order the defendant to return the item itself. It is also obvious from a string of cases that the liability that the current possessor of property incurs is personal instead of proprietary, since it is a determination of the best legal title to the property in question7. Thus, for money had and received, and actions for conversion or wrongful interference in goods, the defendant would be personally liable to the claimant at common law. This means that the defendant simply has to be in possession of the property in question at the time, and is supposed to compensate the claimant without necessarily having to retain the property. This implies that the claimant’s interest in the property is an innominate one. The defendant’s state of mind is largely irrelevant for a claim to succeed at law. He may, or may not know whether the property he is about to possess or does possess is a result of fraud. He will still be liable to compensate if the tracing action by the claimant has identified him as the defendant, since the general rule is that a tortuous claim cannot be defeated by a bona fide purchase for value8. However, this may not be the case for the exchange of money for value as seen in the decision of the House of Lords in Lipkin Gorman v Karpnale9. Considerable difficulty is faced in defining the nature of the claimant’s interest in the money, good title to which passes to the defendant who purchases for good value without notice. The claimant’s interest could not have been full legal ownership or a right to immediate possession, as in the latter’s case, a right like that would incur strict liability at the hands of the defendant10 and thus would be liable to the claimant in conversion. In Lipkin, the defendant received the money for good value but was allowed to be recovered from. It followed that the defendant is not liable because he received the money but because he held it at the time of the claim even if innocently. The action in common law for money had (not received) is thus possible11. Since this makes tracing a very powerful remedy, the law introduces certain limits for successful claims. The first limit pertains to the identification of the property. Both at law and in equity, the property in question must be identifiable and unique to the claimant. It must be attributable to the claimant, and hence, any property that is damaged, or money misspent, or mixed (commonly referred to as mixed funds) is untraceable since the legal title to it has ceased to exist or the property itself may have ceased to exist. Also, as mentioned above, the law requires that the claimant must have had legal title to the property before it can be successfully traced. This excludes the beneficiaries who only enjoy properties subject to the equitable provisions of a trust. This makes their title equitable and thus, common law does not cater to their tracing needs. The claimant who wishes to recover his property must still have good title to it which, although common with chattels and things, is not quite the same with money, title to which passes as soon possession changes hands. Thus, it is accepted by the courts that in most instances, tracing may not be allowed at common law for money where it exchanged hands as the legal title passes to the defendants12. However, as discussed above, there are instances where, even though the defendant may deemed to have acquired possession of money, an action for money had and received was still allowed13. Those cases are appropriately deemed as actions for choses against the defendants. Thirdly, given that the nature of right that exists under tracing at law is personal instead of proprietary, the relevant rules of bankruptcy apply. If the relevant recipient of the property goes bankrupt, the personal nature of the interest directs the claimant into the regular line of creditors which hold an interest in the bankrupt defendant’s estate. This is true theoretically, but in practice, the claimant usually does succeed in acquiring his share of the property first since the trustee in bankruptcy does not want himself to be sued for being the recipient of the claimant’s property. The fourth hindrance to a claim in tracing has to do with the existence of mixed goods, a state of goods which can easily defeat the requirement of proper identification of property at law. What this pertains to is the presence of another individual’s property into which the claimant’s property has been mixed before reaching the hands of the defendant14, thereby losing its uniqueness and the title that the claimant originally held. The title to the property is akin to a title which has been destroyed, thereby rendering it untraceable. Mixed goods are one of the primary reasons common law tracing is rarely successful. The fifth contention is that of the profits that the use of the property has yielded. At common law, the defendant who received the property without notice should not typically be required to surrender the profits obtained from it, as it is contrary to the original principles of tracing the value of the property rather than the property itself. However, this principle is contrasted with that of unjust enrichment, in which case an action in tracing for the return of money had and received will most likely be successful at law. In Trustees of the Property of FC Jones v. Anne Jones15, the defendant had to return the profits earned on the property in question to which the claimant was held to have a better title to. The principle thus established by the Court of Appeal realized the possibility of the following notion: a person with no title to the money in question had no title to the profits generated by the investments made from it. Thus, the claimant was entitled to any unjust enrichments resulting from his property as long as he can trace to them, provided the defendant does not raise the defense of change in position16 which, according to the discretion of the court, could diminish the damages owed in cases of innocently defendants who purchased for value (discussed in Lipkin Gorman) or similarly factual scenarios. Tracing in Equity A trust is an equitable principal, and confers an equitable interest onto the beneficiary. If the trust property is misplaced and has to be traced, the common law principles of tracing will not imply but instead, the equitable principles would take charge as they would govern the process. Tracing in equity has several benefits for the claimant. It is proprietary in nature, and thus has a much stronger hold on the property as a result, so that factors such as whether or not it is mixed with other goods or the presence of bona fide purchasers are considered irrelevant. The proprietary interest works to establish a link directly with the property and thus against the current possessor as it is considered to be a primary asset of the claimant. This also serves to reclaim any profits or enrichments that the property may have been used for by the defendant as the claimant commands full control of it in equity17 (Foskett [2000]). In Re Tilley, the trustee mixed the trust funds in an account with her own money in it, hence, mixing the two, and used the money in that account for property investments. She always had an amount to the count of the trust money in the bank account during the course of her investments. Her ventures proved successful, and eventually the beneficiaries sued for the trust money as well as the profits she acquired. It was held that they were not entitled to the profits, but only the trust money and the interest. This decision was made in light of the principle laid down in Re Hallett’s Estate18 which stipulates that as long as the trustee leaves enough money in the account which encompasses the amount allotted under the trust, money drawn and spent from that account would be treated as their own. Thus, the beneficiaries could not reclaim the profits she acquired. However, had she utilized more money than that, the principle in Re Oatway19, and any profits would be recoverable by the beneficiaries on account of her proprietary interest established by tracing in equity. It is thus understood that tracing in equity does not follow a single charge, such as money had and received, but presents to the beneficiary a host of remedies all at the same time, so that the whole property, its benefits, or part property may be recoverable subject to the discretion of the court20. Hence, it is important to determine who may be able to sue in equity. Tracing in equity is subject to some requirements as well, and only open to a claimant with an equitable title in property. Thus, only beneficiaries may sue, not trustees21. Secondly, there must also be a fiduciary obligation, much like in a trust, between the equitable owner and another person (AGIP (Africa) Ltd v Jackson [1992]22 reaffirmed in Westdeutsche [1996]23). The fiduciary relationship does not necessarily have to be between equitable owner and the person misappropriating the funds i.e the trustee. Thirdly, the trust property must have been misappropriated in breach of trust. Fourth and last, the tracing claim may be defeated by a bona fide purchaser for value who purchased the property innocently, however, the claim may still be lodged against the party that misappropriated the property and delivered it to the purchaser [Re Diplock]. In some cases, the courts may even protect the receiver of trust property who has received it innocently without value. The current view, however, is that the defense of change of position established by Lord Goff in Lipkin is a more apt option. As can be seen, dishonesty of the defendant is of primary concern to equity in tracing. Conclusion As can be seen, tracing is a powerful course of action both at law and equity. It places the claimant in a much better to recover what is rightfully his at the outset following diverse principles for each course segment, law or equity. A beneficiary claimant is considered a victim and allowed to trace from mixed funds, in order to uphold his proprietary ownership and prevent unjust enrichment at the claimant’s expense. However, what falls to determine is whether the diversified approach taken by both law and equity will continue to be demarcated as clearly as it stands today. Foskett v Mckeown suggests in the positive, and thus, a dishonest defendant will always be answerable to the beneficiary in equity and the trustee, in a personal claim at law. Bibliography AGIP (Africa) Ltd v Jackson [1992]. Ch. 547. Banque Belge pour L'Etranger v. Hambrouck [1921] 1 K.B. 321. Boscawen v Bajawa [1995] 1 W.L.R. 328. Farquharson Bros & Co v King & Co [1902] AC 325. Fibrosa Society Anonyme v Fairbairn Lawson Combe Barbour Ltd [1943] [1991] 2 A.C. 548. Foskett v Mckeown [2000] 1 AC 102. Lipkin Gorman v Karpnale [1991] 2 A.C. 548. Re Diplock [1948]. Ch. 465. Re Tilley [1967] Ch 1179. Smith, Lionel [2009] Simplifying Claims to Traceable Proceeds. Law Quarterly Review. Trustees of the Property of FC Jones v. Anne Jones [1996]. 3 W.L.R. 703. Read More