Tracing in Common Law - Essay Example

Tracing is a process by which a plaintiff shows what has happened to his/her property, identifies its proceeds and those persons who have handled or received them thus justifying a proprietary claim against the property, or an asset substituted for the original property or its proceeds. Tracing may also lead to the award of a personal remedy where for some reason a proprietary remedy is not appropriate. Tracing in Common Law Tracing at common law, unlike its counterpart in equity, is neither a cause of action nor a remedy but serves an evidential purpose. The cause of action is for money had and received. The remedy is an order for account and payment. Tracing at common law enables the defendant to be identified as the recipient of the plaintiffs money and the measure of his liability to be determined by the amount of the plaintiffs money he is shown to have received. The traditional learning is that money can be followed at common law into and out of a bank account, but only if it has not been mixed with other money in the account; whereas equity is free from that limitation. This is usually said to be because the rules which govern the appropriation of debits to credits were devised by equity and are unknown to the common law. This is true of the rule in Re Halletts Estate,1 which is not an evidential rule but the corollary of equitys ability (not shared by the common law) to charge a mixed fund with repayment of trust moneys. It is not true of the rule in Re Claytons Case,2 which is a common law rule and is merely an evidential presumption applicable in the absence of express appropriation. The real difficulties in the way of a common law tracing claim are quite different. To understand them it is necessary to distinguish between two kinds of tracing: (i) following the same asset from one person to another; and (ii) following an asset into a changed form in the same hands. The common law has always been able to follow a physical asset from one recipient to another. Its ability to follow an asset in the same hands into a changed form was established in Taylor v. Plumer.3 In following money into an asset purchased with it, no distinction is drawn between a chose in action such as the debt of a bank to its customer and any other asset.4 But in following an asset from one person to another it needs a physical asset such as a cheque or its proceeds to follow. Take the simple case where A pays £1,000 to B and makes the payment by cheque. A draws a cheque on his own bank and hands it to B. B presents it to his bank for collection. If A and B happen to maintain accounts at the same bank, the bank makes appropriate book entries to debit As account with £1,000 and to credit Bs account with the like amount. No money passes. There is no transfer of any chose in action. All that happens is that the banks liability to A is reduced by £1,000, and its liability to B is increased by the same amount. If A and B maintain accounts at different banks, Bs bank delivers the cheque to As bank and obtains a credit for £1,000 through the London clearing system. Bs bank then credits Bs account with £1,000, and As bank debits As account with the like amount. In fact, of course, As bank and Bs bank will have entered into a huge number of transactions between each other in the course of a single day. Only the net balance will be credited to one and debited to the other in the books of the Bank of England. The identity of the £1,000 due from As bank to Bs bank may be entirely lost; the net balance may be the other way. Moreover, the clearing system operates to set off payments not only between the same parties but also between all other parties to the clearing system. The net balance which would otherwise fall to be debited to As bank and credited to Bs bank will be affected by the net balances or transactions between those banks and other participants in the clearing system.5 Any attempt to follow the money through the clearing system obviously presents insuperable practical difficulties.6 A rule which allowed recovery only where the parties happened to maintain accounts at the same bank would be unacceptably haphazard. But in a simple case such as that described there is no need to follow the money. The common law simply follows the cheque from A to B; once in Bs hands, it follows the cheque into its proceeds. If the cheque was stolen, then the £1,000 credited to Bs account represents, not the money in As account, but the proceeds of As converted cheque. A can maintain his legal title to the cheque and its proceeds. But what if the money is transmitted by telegraphic transfer? In such a case there is no cheque or any equivalent. Nothing passes between As bank and Bs bank but a stream of electrons. It is not possible to treat the money received by Bs bank or credited to Bs account as representing the proceeds of a physical asset previously in its hands and delivered by it in exchange for the money. It is not possible to identify the source of the money without attempting to follow it, if necessary through the clearing system; and that, it is suggested, is hopelessly unrealistic. Another situation where the common laws ability to follow the money itself is easily foiled is where the transactions take place in the "wrong" order, B being paid with money debited to an overdrawn account which is later credited with As money. Tracing in Equity There is no difficulty in tracing funds in equity, even where they have been the subject of electronic transfer. There is no need for a physical asset. Equity can follow the chose in action through its transmutation as a direct result of instructions given to the two banks from a debt owed by As bank to A into a debt owed by Bs bank to B. It is not necessary to follow the money through the clearing system or to pretend that any chose in action has been assigned. It is not necessary to establish that the money credited to Bs account is the identical money debited to As account. It should not matter in what order the various transactions took place. Equity acts on the conscience of the recipient; and the existence of a direct causal connection between the debit and the credit should sufficiently identify the one as the source of the other to enable the money credited to Bs account to be taken to represent the money debited to As account. (Different considerations arise, however, when the question is, not whether the money received by B should be taken to represent the money belonging to A, but whether B still has it. One of the unfortunate aspects of the present law is that these two questions tend to be treated as indistinguishable.) The only restriction on the ability of equity to follow assets is the requirement that there must be some breach of trust or other fiduciary obligation which permits the assistance of equity to be invoked. The requirement has been widely condemned by academic writers, but the law was settled in England by Re Diplock. The doctrine can be reconsidered only by the House of Lords. It assumes that tracing is a product of equitys exclusive rather than its auxiliary jurisdiction; but it is far from clear that this is so. It has been suggested7 that it rests upon a misreading of the decision of the House of Lords in Sinclair v. Brougham,8 a case which, it has been justly observed, "is largely what one chooses to make of it."9 The requirement is, in fact, less restrictive of equitys ability to intervene than is often supposed. In the first place, it is not necessary that the fund to be traced should have been the subject of fiduciary obligations before it got into the wrong hands; it is sufficient that the payment to the defendant itself gave rise to a fiduciary relationship as held in Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd.10 In that case, however, equitys assistance was not needed in order to trace the plaintiffs money into the hand of the defendant; it was needed in order to ascertain whether it had any of the plaintiffs money left.11 The case, therefore, does not provide an exception to the rule that there should be an initial fiduciary relationship in order to start the tracing process in equity. In the second place, the requirement is readily satisfied in most cases of commercial fraud, since the embezzlement of a companys funds almost inevitably involves a breach of fiduciary duty on the party of one of the companys employees or agents. The question has been asked: "What sort of fiduciary is relevant for tracing purposes and why?"12 An answer was suggested in Agip (Africa) Ltd. v. Jackson.13 He need not be a director or a signatory on the companys bank account. It is sufficient that he was a person whose fiduciary position gave him control of the companys funds or provided him with the opportunity to misdirect them. The only situation in practice in which it may be impossible to invoke the assistance of equity is where the money has been stolen by a thief. In England, at least, it would be heretical to regard a thief as a fiduciary or a simple theft as giving rise to a constructive trust. It is otherwise in the United States of America14 and, possibly, in Australia.15 There should be no need to resort to such heresy. There is no reason in principle why equity should not intervene in such a case on the basis of a resulting trust. Theft does not deprive the true owner of his legal title; and a fortiori it does not deprive him of his equitable title. It has never been a requirement of the equitable tracing claim that the legal and equitable titles should be divided. The requirement that the loss must have arisen from a breach of fiduciary duty is difficult to understand and impossible to defend.16 The Development of a Unitary Law of Tracing Professor Birks in his important essay The Necessity of a Unitary Law of Tracing,17 expressly endorsed by Lord Steyn18 and by Lord Millett19 (with whose speech Lord Hoffmann20 agreed except on one point) in Foskett v McKeown, has made it clear that, in truth, tracing is a process of identifying assets which belongs to the realm of evidence and tells us nothing about what rights, personal21 or proprietary, legal22 or equitable,23 the plaintiff can assert in respect of the traced assets.  There is a unified regime for tracing so that the flexible sophisticated equitable rules also apply where the plaintiff’s claim has a legal, as opposed to an equitable, proprietary base.24 However, tracing must be clearly separated from the business of asserting proprietary rights or personal claims in relation to assets successfully traced, being regarded as substitutes for the plaintiff’s initial assets. The tracing process merely concerns assets so that shares can be traced into the proceeds of sale thereof which can be traced into a flat.  The separate issue then arises as to whether the plaintiff’s initial proprietary interest and the circumstances surrounding its disposal are sufficient for the plaintiff to establish a legal or equitable proprietary right in successfully traced assets or merely a personal claim against the defendant owning such assets. Thus in Bracken Partners Ltd v Gutteridge25 Peter Leaver QC, sitting as a Deputy High Court Judge, concluded in the light of Foskett v McKeown that there is now only one set of tracing rules and there is no longer any necessity for there to be a pre-existing fiduciary relationship for tracing to be permitted.  Nonetheless, he found a trust had arisen so his remarks, like those of their Lordships in Foskett, were obiter dicta. However, Rimer J in Shalson concluded that because Foskett concerned only obiter dicta “it cannot be said that Foskett has swept away the long-recognised difference between common law and equitable tracing”,26 in particular “the need to identify a fiduciary relationship as a precondition to tracing into a mixed fund”,27 but he found28 there was “a fiduciary relationship sufficient to invoke equity’s tracing ability,” so his remarks were obiter dicta. In my humble view, although Foskett concerned only obiter dicta, the strong opinions of Lords Steyn and Millett, strongly supported by impressive academic publications, should be taken to have swept away any differences between the common law and equitable tracing rules, which are merely evidentiary rules, so that the equitable tracing rules are the tracing rules, but, of course, without prejudice to the separate establishment of the appropriate remedy in respect of the successfully traced assets which will depend upon the nature of the plaintiff’s claim.  Any first instance judge should therefore proceed on the basis that there is one unitary set of tracing rules and should have no fear of being reversed on appeal on this issue. Read More