Tracing Rules at Law and in Equity - Case Study Example

Tracing rules at law and in equity A trustee in administration of the estate performs a wide range of duties and he might be liable if he/she breaches any of his duties either through commission or omission1. A beneficiary who is a victim of the breach of the duty owed to him/her by the beneficiary can have several remedies and one of them is tracing. Tracing, however, can best be described as a process of identifying value that a defendant has received. This can either be in the form of assets or in the other forms. It is thus a process that a claimant would follow to get his or her property that is in the hands of another person. In this sense, a beneficiary can pursue that property either by following it or by or seek a tracing. There are two sets of rules of tracing; there are common law rules and rules of equity. Equitable rules recognise beneficial interest in money while common law rules usually recognise legal interest. Courts will apply these rules to decide whether what the defendant holds is the same as what the plaintiff is seeking. A victim seeking tracing has to prove his claim either at common law or at equity depending with whether he or she is alleging legal ownership or equitable interest in the property. However, a victim would usually find it difficult to trace money at common law where the money has gone through bank accounts because it would be problematic to identify while at equity it would be easier because equity cannot be defeated with the issue of mixed money in the account. Many commentators and judges have held that the law has failed to bring about unity in the rules of common law and equity regarding tracing. For instance Millet LJ suggests that there is no sense maintaining different rules for tracing at equity and common law2. He feels that only one set of rules would be enough and to him that set is the common law rule. This suggestion makes sense until one considers critically the wider view of tracing process. Therefore in this essay, I would consider this assertion by Lord Millet and the broader view of the rules of tracing that exists at common law and equity. In the case of Trustee of the Property of F.C. Jones and Sons v Jones,3 Millet LJ decided entirely basing on the common law. In this case F.C Jones and Sons sued and was granted judgement against a firm and when the judgement was not satisfied, bankruptcy notice was issued. After failure to comply with the notice, the Jones partners committed a bankruptcy act. After commission of the bankruptcy act and even before adjudication, Mrs. Jones opened another account with another firm so as to enable her deal in the potato futures market. She paid into that account a total of stlg11, 700 in the form of cheques to be drawn on the partners account. Her business in the potato future was highly profitable and she received £50,760 in the form of cheques from the commodity brokers. She paid these cheques into a deposit account in which she was having a balance of £49,860. The trustee sued claiming this money arguing that he had legal title. The case went up to the court of appeal and the court held that the money in the call deposit account that remained was to be paid to the trustee in bankruptcy although this was the profit. Millet LJ in his view held that this was a proprietary claim and to him money had not been mixed and hence property did not pass to Mrs. Jones. He held that money had and received action ought to be limited to that amount received but however, the trustee in this case did not make a proprietary claim other than a personal claim. Millet LJ seems to have reasoned that the plaintiff could still be able to identify the money in the defendant hands although she had already invested the money that she had received in from the commodity futures. This needs to be analysed to establish if it is possible. Therefore in analysing this judgement I have to consider the reasoning in other cases. In the case of Agip (Africa) Ltd v Jackson4, Millet Judge, observed that, observed that "the common law claim for money had and received is a personal and not a proprietary claim and the cause of action is complete when the money is received." This decision was upheld in Court of Appeal5. It would have thus followed that in order to establish liability for money in such a case, it would have only been necessary to establish that Mrs. Jones had received £11,700, and that at the time of receiving the money, the plaintiff had title to that money. In the case that the court could have followed this reasoning, then it would definitely have been irrelevant to consider whether the trustee retained the property in that money after Mrs. Jones had received them. The plaintiff in the case of Jones also claimed the profits that Mrs Jones had received after investing the money and this makes the situation in this case to be difficult. However it has been held in other cases that since the property belongs to the plaintiff he can benefit from the proceeds of the property. For instance, in the case of A-G for Hong Kong v Reid6 it was held that because the defendant was a constructive trustee in the money received as bribes the plaintiff had a beneficial interest in that money and anything purchased using that money7. From the outgoing, it is thus evident that if the plaintiff is claiming equitable title it would be traced in equity while if he is claiming legal title the rules of common law as regards tracing would be used. A personal action can be complete once the defendant receives money and it would not necessary for the plaintiff to prove further. However, personal action would of little use where the defendant is bankrupt. The basis of any action would be receiving money using unjustified means hence whatever happens after the defendant has received the money ought to be irrelevant. The plaintiff in such a case would not be able to claim the value of the money if the defendant has invested it and it has increased in value. This analysis is consistent with the judgement of lord Millet as he held that title to the money in question did not pas to Mrs. Jones because it could be traced at common law hence to him this was a claim at common law. Lord Millet thus based his judgement on the common law rules of tracing. However, it is usually easier to trace money at equity than at common law especially where the money is in the bank account but Lord Millet did not think that the plaintiff had received the money in the fiduciary capacity. Tracing in equity require that there be a fiduciary relationship before one can claim. These can further be seen in the decision of the Privy Council in the case of Re Goldcorp Exchange Ltd8 and from the approval the case of Re Diplock's Estate9 by the HL in the case of Westdeutsche Landesbank Girozentrale v Islington London Borough Council10. From these cases it can be concluded that Mrs. Jones did not obtain legal title. Liability at common law is strict while that at equity is more flexible and this is a distinction that one should look at when seeking tracing either in equity or at common law. The court in the case of Lipkin Gorman (a firm) v Karpnale Ltd11 found that neither common law claim of tracing nor the action for the money had and received is dependent of the on the fault or knowledge of the defendant although a personal claim would be subject to a number of defences such as that the defendant had provided consideration. On the other hand equity will only intervene if the conscience of the defendant is affected. This was reiterated further in the case of Westdeutsche by the HL meaning that the imposition of constructive trustee on the ground of knowledge of receipt will depend on the knowledge of the defendant. In the judgement of the case of Jones, this distinction seem to have been immaterial as Mrs. Jones was already aware of all the relevant facts and in the case that legal title could have passed to her she could have become a constructive trustee and founded a fiduciary relationship that could have been necessary for an equitable claim and she could have been liable for the profit she had received. This case to some extend removes an anomaly by reaching similar results even though title had not passed. But by removing this anomaly, another technicality comes in because where the conscience of the recipient is not affected, there will be no liability in equity at all but at common law there will be liability if legal title had not passed. Lord Millet’s view that the defendant had not obtained legal title to that money and that t legal title had at all times been with the plaintiff and she could not become a trustee. Lord Millet further considered the effect of the doctrine of relation back under bankruptcy and he referred to his own judgement in the case of Re Dennis12 and further to the decision of the court of appeal in the case of Re Gunsbourg13. He thus concluded that the effect of the act of bankruptcy by partners in that case was to vest legal title to the trustee in bankruptcy. It therefore follows that the case of Jones title had vested in the trustee in bankruptcy right from the date the act of bankruptcy was committed and therefore partners could not pass title to Mrs. Jones. Lord Millet was of the view that the trustee in bankruptcy had to trace the money in the bank in order to obtain the profit although it the money must have become mixed with other money. However, under the common law it had previously been held in the case of Agip Ltd v Jackson, which the plaintiff could not trace money that was in the hands of the defendant when the money had gone through the bank at New York although they were successful with the equitable claim of tracing. Therefore the same would have applied in the case of Jones but Lord Millet did not think this was necessary. Lord Millet advanced a further argument to support his judgement that if the cheques had passed to her and not equitable interest, she could have received the money as a constructive trustee and this could have made her liable in to a proprietary claim. He held that it could not make sense, "if a person with no title at all were in a stronger position to resist a proprietary claim by the true owner than one with a bare legal title." He thus held that there was no need of having different rules in equity and at common law and that although the rules are different, the court should not create further differences in the two regimes. However, I do hold that comparing the two systems, a clear difference must be seen since the two concentrate on different issues. In summary, it is clear that cases of this nature especially where one is claiming tracing at common law and hence Millet LJ’s holding that holding that there should be fusion of the two sets of rules is uncalled for. However, his judgement was similar to the judgement by Lord Bankes in the case of Banque Belge pour l'Etranger v Hambrouck14. The ability of common law to convert money and property was evident to the decision in the case of Belge if this case was decided on common law rules. When one looks at lord millet’s view for the first time, it can easily be concluded that the case only deals with situations where the money is not mixed but on a clear examination it would be clear that he is only attempting to remove an anomaly. Had the money become mixed in this case legal title would have passed to her hence she would have been liable as a constructive trustee. It is however, evident that it would be difficult to justify the result6 where the conscience of the defendant is not affected since the outcome would depend on whether the money is mixed or not. In my view, the processes of tracing at common law and at equity are two different things. It is now obvious from the above discussion that the basis a claim of tracing at common law is restitution of property and the defendant can only be sued personally15. This seems to be the reason why change of position is a defence at common law and the remedies are not as strong as those in equity. In contrast, the process of tracing in equity is proprietary claim and one cannot sue the defendant personally. This seems to be the reason why there is always a fiduciary requirement and remedies are usually so strong as compared to those in law. Bibliography 268Gareth Jones, Goff and Jones: The Law of Restitution (1st supp, 7th edn, Sweet & Maxwell 2009) K Zweigert and H Kötz, An Introduction to Comparative Law (Tony Weir tr, 3rd edn, OUP 1998) P Birks , Misdirected funds: restitution from the recipient ( Lloyd's Maritime and Commercial Law Quarterly[1989] 296) P Birks , Restitution and Resulting Trusts, in Goldstein, Equity and Contemporary Legal Developments (The Hebrew University of Jerusalem Publishing 1992). P Millett , Tracing the Proceeds of Fraud (Law Quarterly Review1991). L Smith , Tracing in Taylor v Plumer: Equity in the Court of King's Bench ( Lloyd's Maritime and Commercial Law Quarterly (1995) 240). Gregory P, `Tracing: Establishing a Proprietary Interest in Assets in the Hands of Others` Remedies in Practice (Seminar held on 17 November 2010 at 3 Albion Place, Leeds) P William, Handbook of the Law of Torts (OUP 1984) L Smith , The Law of Tracing, (1st ed, Oxford: Clarendon Press, 1997) S Margaret , and M Alistair , Tracing in the Age of Restitution,(University of New South Wales [ 2003] Journal 377 P Radan , C Stewart , A Lynch , Equity and Trusts [2001] 445-451 S Hepburn , Principles of Equity and Trusts ( Ashburner publishing 2001) A Mason , ‘The Place of Equity and Equitable Remedies in the Common Law World’ [1994] 110 1 Law Q. Rev. 238, 239. J Derrida ‘Force of Law: The “Mystical Foundation of Authority’” in 2 Deconstruction and the Possibility of Justice, eds. D. Cornell, M. Rosenfeld, and D. Carlson [1992] 23. Case list A-G for Hong Kong v Reid [1994] 1 AC 324 Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321 Re Dennis [1995] 3 WLR 367 Re Diplock's Estate [1948] Ch 465 Re Goldcorp Exchange Ltd [1995] 1 AC 74 Re Gunsbourg [1920] 2 KB 426 Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 Trustee of the Property of F.C. Jones and Sons v Jone, The Times, 13 May 1996s Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961 Read More