Equity and Trusts

04 Tracing

PART IV TRACING
I Introduction
A Definition

Tracing is a process for identifying value received by the defendant and establishing a causal connection between that value and the plaintiff. It is, in other words, a method of finding property held by the defendant to which a plaintiff is entitled. Despite often being described as a remedy, tracing is essentially an evidentiary techni ue, which may in turn give rise to remedies at the suit of the plaintiff. Tracing is simply a precursor to the assertion of their proprietary claim.
Tracing is the process by which a claimant who has been deprived of property (the original property) seeks to assert legal or equitable title to other property (the target !tone property) and "c#eough thathas, tracing is normally defined reference because theobserve target property in some way, been acquired from eby ploitation of the original property! The process involves establishing an unbroken chain of transfer metaphor of $following property into the hands of another%.& A more and transformation from the original property to the target property! "f this process is follows' successful, the claimant can claim property rights in the target property and enlist an appropriate remedy in rem to recover it!

to the colourful specific description

Tracing only applies to fungible assets. A fungible asset is a generic right or resource such that any instance of it is as good as any other. (or e)ample, money is a fungible asset' in general, any coin or tendered instrument is as valuable as any other e uivalent. In *rady v !tapleton +&,-./, Di)on 0 made the +controversial/ observation that sheep are also a type of fungible * 2 uitable Tracing 3ules property. (urther e)amples include grain, gold, copper, uranium and other 2 uitable tracing rules govern the process of tracing. They are broader than their common law resources. e uivalents. 4ollectively, the e uitable rules prescribe a method for identifying a chain of title 5
transactions and transformations 5 lin1ing plaintiff to defendant, and original property to target property. !imple cases, as where the plaintiff%s money is readily traceable into the defendant%s hands as a discrete unit of value in the same form, do not re uire comple) analysis. Instead, the tracing rules deal with three problems'

!trictly spea1ing, tracing is only necessary where the plaintiff%s property has been transformed in some way +as by e)changing it for other property/. If the defendant simply has possession of the & "argaret !tone and Alistair "c#eough, $Tracing in the Age of 3estitution% +.006/ .7 8niversity plaintiff%s original it is possible to $follow% that property directly to of 9ew !outh :ales ;aw 0ournalproperty, 6<<. the defendant. If the plaintiff prior legal or e uitable title to that property, he or she will be = 0aani 3iordanhas .007 >age & of 6http'??www.@aani.net? entitled to it in priority to the defendant as a matter of law.

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1 Exchange substitutes

:here the defendant converts the plaintiff%s value into another formA

2 Mixing :here the defendant intermingles the plaintiff%s money with other fundsA and 3 Accrua in !a ue :here the defendant applies the plaintiff%s property in such a way as to increase its value.

Tracing itself is little more than $e uity%s sniffer dog%, and is of little independent interest. Bowever, it does provide the foundation for a secure remedy that affords priority to the plaintiff over the defendant%s unsecured creditors. It might also allow the plaintiff to 4 3elationship with *arnes v Addy reap the benefit of >roperty may beof traced intoheld the by hands third parties, providing such any increase inalso value property the of defendant. Doctrines of tracing parties are not bona are therefore fide purchasers for fact value without is a defence to a tracing significant for the that they notice. give rise+This to proprietary +among other/ claim' see below >art IC./ remedies. Although such a person may not be part of the breach, property can be recovered from them if it is traceable. Alternatively, tracing may provide a proprietary remedy e)isting alongside personal liability under *arnes v Addy, including return of the property. Tracing is not useful when the property has been dissipated by the person 3estitution is a remedy that allows a plaintiff to recover a benefit received by another in involved in the breach. circumstances where it is un@ust for that other to retain it. The normative rationale behind un@ust enrichment is simple. If A somehow ac uires the property of *, but * did not intend to gift it to A, (or e)ample, if the defendant loses the trust property it has received at the then there is a strong case for demanding its return. 3estitution provides @ust such a mechanism. casino, tracing will not Bowever, whereas un@ust enrichment is concerned with return of a benefit un@ustly received, tracing is concerned with the vindication of propertychain rights. 8nli1e tracing, for e)ample, be available since the tracing was bro1en by restitution the property%s dissipation. does not depend upon the e)istence of a proprietary right in the plaintiff, nor upon any 9aturally, in Instead, such the a right is causally lin1ed to the plaintiff' the defendant will only transactional analysis. be obliged to ma1e fair and @ust restitution of a benefit where it is derived at the e)pense of the case and personal liability would still attach to the plaintiff it is un@ust to retain it' >avey D "atthews >ty ;td v >aul +Deane 0/. defendant by way of a *arnes v Addy claim. Tracing and restitution are directed towards the same endA namely, the return of improperly received property fromif another. the content of each is very involves 4onversely, the Bowever, property passes to a different. third Tracing party by way of gift, or if the establishing a chain of titleA it re uires continuity of property rights and has as its basis property property is e)changed . !ee generally !tone and "c#eough, above n &. for other property in the possession of the defendant, but the defendant is insolvent, a proprietary = 0aani 3iordan .007 >age . of 6http'??www.@aani.net? remedy is needed. This is where tracing becomes of great importanceA it allows such property to be recovered at the suit of a plaintiff.
D 3elationship with 8n@ust 2nrichment.

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law. Tracing is simply an evidentiary mechanism by which a plaintiff can establish their e)isting property rights in an asset wrongly held by another. 3estitution, by contrast, is founded in un@ust enrichment. It is a causal en uiry allowing a claimant to obtain title to property notwithstanding 2 3elationship withanother. the 4ommon ;aw that currently title is held by
4ompared with the fle)ible metaphysics of e uitable tracing, tracing at common Despite these differences, some scholars argue that un@ust enrichment and law is relatively tracing should be rudimentary and materialistic.

unified into a single remedial doctrine.

4ommon law tracing is only possible while property claimed from the defendant continues to derive solely the plaintiff%s original property +Taylor v >lumer/. That is, Taylor v Plumer (1815)from UK: once it has been Facts mi)ed or pooled other assets, tracing halts. Bowever, a basic transformation E >lumer as1s :alsh to with purchase some property for him Instead,5 :alsh buys securities +shares and gold/, and attempts to abscond to the 8nited of Eform such !tates as Ean >lumer e)change discovers :alsh%s from deception, money and prevents into goods, him from leaving goods into money, or one 1ind of goods E :alsh declares ban1ruptcy into another E :alsh is clearly in breach of duty and owes the money to >lumer E Bowever, :alsh%s creditors do bar not want the property this would reduce 1ind of goods 5 is no toto areturn tracing en since uiry.
the amount they are able to recover from :alsh through his asset pool E 4onse uently, his creditors sue >lumer, arguing that he is not entitled to recover the property and should instead be an unsecured creditor to obtain a portion of the pool

Issue E Is a proprietary tracing remedy available such as to ma1e >lumer a secured creditorF 3easoning E Ges, the property can be traced, despite having changed form +money to securities/ E It remains the property of >lumer so long as it is distinguishable from other property E Tracing only ceases when the $means of ascertainment% fail o (or e)ample, if >lumer%s money was mi)ed with H& of :alsh%s own money, and this was then used to purchase shares, common law tracing would fail o I*y contrast, this sort of mi)ing would not be fatal to an e uitable tracingJ Decision E Tracing is allowedA however, common law tracing is relatively infle)ible

At common law, the rule in 4layton%s 4ase governs the tracing of moneys in mi)ed funds. In short, tracing at law is not permitted into funds derived from more than one source.
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Claytons Case (1816) NSW SC: ssue E As between ban1er and customer, when trust funds are mi)ed into a ban1 account, how does one identify which money has been ta1en out of the account and which remainsF 3easoning E (or purposes of convenience, it is presumed that the sum first paid into the account is the sum first drawn on it +$the first in, first out rule%/ E This is a rule of convenience, since in reality it would be impossible to distinguish between each deposit and withdrawal +all cash being indistinguishable/ E Bowever, this rule will be overridden by a contrary intention that certain of the moneys were intended to be spent E In relation to ban1er and customer, this rule prima facie applies +though may be overridden relatively easily/A in other conte)ts, e uitable rules apply

Today, tracing at common law is of little significance. 2 uitable tracing is less onerous, available in a wider spectrum of circumstances, and grants access to e uitable proprietary remedies 5 such as the constructive trust 5 of farKreaching scope and unparalleled fle)ibility, as well as declarative and in@unctive relief +see, eg, the "areva order/.

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II E"uitab e Tracing Ru es
A 4onceptual (oundation

2 uity adopts a $metaphysical approach% to tracing.6 >roperty can change hands and form across a series of transactions. It can be mi)ed, separated, grow and diminish in value. *ecause of the wide number of circumstances to which tracing is sought to be applied, e uity has 1 Transaction a##roach Tracing is an e)ercise in following value from one person to another in a series of developed a number of tracing rationales. "ost cases oscillate between the two most common transactions, during which the property may change hands and formA if at any of point that value is lost, tracing ends +as in ;ofts/A see, eg, !mithA and these' 2 $%o en assets theor&
Tracing is simply a charting of the relative increases and decreases of wealth between the partiesA instead of loo1ing for specific transactions, consider the overall effect of the course of conduct +see !imon 2vans/.

The effect of these theories is considered below.

* A (iduciary >reconditionF

Issue' is it a #recondition to tracing that there be sho%n a (iduciar& re ationshi# bet%een the # ainti(( and so)eone in the chain* E"uit&+ it is said+ re"uires a (iduciar& ob igation to be o%ed to the c ai)ant b& either the de(endant or a third #art& through %hose hands the #ro#ert& #assed in so)e (or), The status this !e "alletts #state o( (18$%) UK C&: re"uire)ent in Austra ia is unc ear, !eason'n( The traditiona ru e is that the #ro#ert& )ust re ate to or deri!e (ro) so)e (iduciar& re ationshi#, That is+ at east one in- in the chain )ust be (iduciar&,
E 2 uitable tracing rules are applied whenever a fiduciary relationship is established E It is unclear whether this is meant to e)clude tracing in all circumstances in which there is no such relationship, or whether it is @ust an inclusive statement of form

An alternative view is that all that that must be established is that the claimant has a proprietary interest in the property wrongfully dealt with by the defendant. This view is dominant in the 8nited !tates of America and 9ew Lealand. Bowever, the position in Australia is not clear. !ee, eg, *lac1 v (reedman D 4o.
6 3e Diploc1 I&,4MJ 4h 47-, -.0 +;ord Nreene/.

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)lac* v Free+man , Co (1816) NSW SC: Facts E *lac1, an employee, steals money from his employer E !ome of that money goes to the employee%s wife Issue E 4an money be traced into the wife%s handsF 3easoning E There is no discussion of whether the employee is in a fiduciary relationship with the employer E It is unclear whether this means that such a relationship is assumed to e)ist between employee and employer +it does/ and is therefore not mentioned, or whether the failure to refer to a fiduciary relationship simply indicates that such a relationship is unnecessary for tracing E At this time, the employeeemployer relationship was not an established category of presumed fiduciary relationships E 4onse uently, it seems more li1ely that a fiduciary relationship is unnecessary Decision E Tracing is available, though whether a fiduciary relationship is a precondition to its availability is unclear

Two reasons are commonly offered in support of such a re uirement. (irst, e uity, it is said, acts on the conscience of the recipient, so there must be some fiduciary obligation binding the conscience of the recipient or an intermediary before tracing through that party will be possible. !econd, tracing being a mechanism founded in property law, there must be an unbro1en chain of proprietary interests. The legitimacy of the fiduciary re uirement must be called into uestion when regard is had for its deleterious doctrinal effects. In 4hase "anhattan *an1 9A v Israel*ritish *an1 +;ondon/ ;td +$4hase *an1%/, for e)ample, theretains 4ourt treatedinterest the e)istence of a fiduciary the "anhattan notion that a person who makes a payment in mistake a proprietary and the recipient is sub#ect to a fiduciary duty from the moment of recipient! There is no relationship e planation of how the conscience of the recipient can be affected if he or she is unaware as a reofuirement the mistake! for $ a proprietary tracing remedy. *ecause of this, it strained to find a fiduciary relationship between two armsKlength commercial parties. The 4ourt probably did so because, The reasoning (but not the result) in %hase &anhattan 'ank seems to us to be flawed! given The the defendant%s insolvency, only a proprietary remedy would be effective. Bowever, in finding that the recipient of the payment owed fiduciary obligations to the %hase so &anhattan 'ank seems to be a conclusion subsequent to the conclusion that the paymentdoctrines should be repaid, rather than antecedent (s such the concept of doing,mistaken fiduciary were warped andto it! corrupted for the sa1e of $discretionary remedialism%. As !tone and "c#eoh note, the chief difficulty with 4hase "anhattan *an1 is
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a fiduciary relationship between the parties added nothing to the analysis of the problem but served only to obscure the reasoning of the court!)

The obvious solution is not to re uire a fiduciary relationship in order to found a tracing claim. One alternative way to found the claim is to pose that a resulting trust arises upon transfer, so 4 "i)ing 3ules that fiduciary obligations are deferred until the recipient is aware of the mista1e' >ort of *risbane In e uity, mi)ed funds involving trust money are treated differently than at 4orporation A9L !ecurities ;td. common law.vThe
archetypal case will involve beneficiaries claiming entitlements to proceeds from a breach of trust against the trustee.
n re "alletts #state- Knatc&.ull v "allett (18$%) UK C&: Facts E A solicitor holds money on trust for clients in the form of 3ussian bonds E !everal clients% money is misappropriated by Ballett and held in his ban1 account as a debt owed to him by the ban1 E Bowever, Ballett ma1es several payments out of the account to third parties who ta1e an unencumbered legal interest E Ballett dies E The clients discover the fraud and see1 to trace their funds into the hands of the estate in order to recover their entitlements

& "i)ing and subse uent withdrawal

Issue E Are the clients entitled to trace into the estateF 3easoning +0essel "3/ E If the 4layton +common law/ rule were to be applied, the plaintiffs would not have recovered +since several payments had been made out of the account/ E The plaintiffs argue that a different e uitable rule should apply because the defendant is a defaulting fiduciary who has stolen in e uity o 9ote that, although there is clear e uitable fraud on these facts, if the fiduciary%s behaviour can be conceivably described as lawful and not in breach of duty, then the 4ourt will construe their behaviour in the most favourable light for tracing purposes E This submission is acceptedA a separate, e uitable tracing principle should apply in circumstances where' o A fiduciary misappropriates trust moneyA then o "i)es that money with his or her own moneyA and o Dissipates that money in some way E >rinciple' the fiduciary will be treated as dissipating his or her own money first o Any withdrawals are treated as first drawing on their own money, not the beneficiary%s, to the e)tent possible
4 !tone and "c#eough, above n &, 6M-.

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o This is most consistent with the principle that the breaching fiduciary%s conduct will be construed as favourably as possible o !ince the fiduciary is entitled to withdraw their own moneys from their account, but not entitled to withdraw trust moneys belonging in e uity to their principal, their withdrawals will be construed accordingly 5 as diminishing their own, lawfully held funds, not those of the trust o Trust money will only be dissipated to the e)tent that withdrawals e)ceed the value of the trustee%s own funds o +Bowever, if the trust money is dissipated, subse uent deposits will not be traceable by the beneficiary' ;ofts v "acDonald/ +$the lowest intermediate account balance rule%/ Decision E The clients can recover from the estate, since the withdrawals did not affect trust money

These cases demonstrate that tracing is only available to effect recovery of assets in which the plaintiff itself has a proprietary interest. This reveals the property law foundations of tracing in e uity. Another e)ample of tracing was provided in 3e Diploc1, where the 4ourt of Appeal held +and the Bouse of ;ords affirmed/ that tracing was available against wrongful recipients under an invalid residuary clause in a will. The e)ecutors could trace into payments made to these recipients to the e)tent that they could be identified and disentangled from other property. . "i)ing and subse uent investment

If the trust funds are withdrawn and subse uently invested, a plaintiff may ma1e a claim with respect to the investment +which may have accrued in value/ in proportion to their share in the money invested. This issue was first considered in 3e Oatway.
!e /at0ay (1%12) UK C&: Facts E Oatway is a solicitorA he deposits P<000 into a ban1 account +P6000 of which is misappropriated trust money, P4000 of his own money/ E Oatway withdraws P.&6< and uses it to purchase shares in a company called O43 E The balance of the account, following this withdrawal, is P4M76, but Oatway subse uently becomes insolvent and dies E The plaintiff, the beneficiary of Oatway%s client trust fund, see1s recovery of the money E The shares are the only asset available against which to ma1e a claim Issue E 4an the plaintiff trace their trust money into the sharesF 3easoning +0oyce 0/ E If 3e Ballett%s 2state was applied, the fiduciary%s own money would be presumed to be withdrawn, so that the entire investment could be traceable only to Oatway%s funds, not

In general, the beneficiary is entitled to profits in proportion to their own $contribution% by way of money misapplied by the breaching fiduciary.

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E E E E

the plaintiff%s The plaintiff would not be able to recover, since the remaining funds were dissipated $The fiduciary must be debited with all sums Idrawn and dissipatedJ% $The trust must be debited with any sums ta1en out and duly invested% Thus, the fiduciary will be deemed to have withdrawn his own money, and the trust money will be ta1en to have been drawn and invested in the shares

Decision E The trust money is therefore traceable to the shares, and the plaintiff can recover to that e)tent E The plaintiff can recover P.&6< of their P6000 misappropriation

Thus, where trust money has been invested, the plaintiff can trace into the investment since the trust money will be deemed to have been invested. 2ssentially, the fiduciary will be treated as dissipating their own funds first +unless all funds are dissipated/. Although this is a reasonably clear rule capable of certain application, the ad hoc development of *ofts v &ac+onald reflects the fact that equitable tracing rules do have limits for these concessionary rules in response to situations of un@ust retention does invo1e a vision of plaintiffs! tracing as a 1ind of restitution.

(lthough ,e -allett means that the defendant is treated as dissipating his own money first, once those funds (1%$7) are 8l+ e SC: hausted the trust money begins to be spent! Trust money 3o4ts v 5ac6onal+ cannot be traced to Facts the tent "acDonald, it is spent! E e A builder, contracts with the ;ofts to build their house
E In return, the ;ofts pay H&700 to "acDonald, to be held on trust and used to meet building e)penses E Bowever, "acDonald deposits the H&700 into his own ban1 account +in breach of trust/ E !everal days later, "acDonald dies E Bis estate continues to operate the ban1 account, collecting on and paying out debts E The balance of the account fluctuates, but reaches a lowest point of HM.4. E At the time when the estate was declared insolvent +not being able to meet its debts/, the account%s balance is appro)imately H.M00 E At this point, the balance is froQen and insolvency proceedings are commenced E The ;ofts now see1 first recovery of their H&700 by tracing it to the accountA they want to have priority over "acDonald%s other creditors by tracing Issue E Is tracing for the H&700 possible despite the fact that the balance dropped well below H&700 5 was the trust money dissipated at that pointF 3easoning E 3e Ballett%s 2state is the starting pointA it suggests that "acDonald%s e)ecutors spent "acDonald%s own money first, up to the last remaining H&700 E Bowever, this principle only applies when there is always an amount in the account capable of meeting the debt in addition to the trust money

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E If at any time the balance drops below the amount of misappropriated trust money, tracing will no longer be possible to the e)tent that the debt cannot be satisfied +those funds are deemed to be dissipated/ E Bere, the balance dropped below H&700, to HM.4., at one point Decision E The ;ofts are awarded a charge over the account to the e)tent of HM.4., but no more *ofts as decided reflects a decidedly transactional approach to tracing. the balance of the account is tracked through its various states in linear, chronological fashion, such that a dip in the balance at an early stage prevents full recovery later! (ccording to the swollen assets theory, however,

*ofts should have been decided differently! (t all times, &ac+onalds estate was un#ustly enriched by the inclusion of the /0122, using which it was able to stave of bankruptcy and pay its debts for some finite period! "f the true rationale for tracing is restitutionary D Tracing :here >roperty Increases in Calue in nature, it ought not & >roportionate to matter how contributions any intermediate transactions affected the defendants value 4cott v 4cott isthe a dispute between the family of a defaulting fiduciary and the deceaseds second 3 #ust that wife! The property the sub#ect of the trust is abreach, house! "t and sets out following tracing rules. of defendant has been enriched by the is the now presently capable +a/ If an asset has been ac uired solely with the plaintiff%s money, a constructive making restitution! trust will be granted over the asset in favour of the plaintiffA
+b/ Otherwise, a plaintiff can trace into the full value of an ac uired asset in +c/ Deductions must be made for any money already repaid to the plaintiffA +d/ The plaintiff will be entitled to a proportionate share in the remaining value of the

proportion to the amount of their money used to ac uire itA

propertyA

+e/ The remedy depends on the nature of the asset that has been ac uired' +i/ If the property is specifically severable, it will be divided in proportion to

the parties% beneficial entitlementsA constructive trustA

+ii/ Otherwise, the plaintiff can choose between an account of profits and a +iii/ If the plaintiff elects to receive an account of profits over a fi)ed +not

floating/ asset, it can be secured by an e uitable charge or lien over the portion of the asset to which the plaintiff is entitledA to the e)tent of the plaintiff%s entitlement, but the plaintiff must be the ris1 of any fluctuations in value from the date of @udgmentA

+iv/ If the plaintiff elects to receive a constructive trust, one will be imposed

+f/ All valuations are to ta1e place from the date of @udgment.

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Scott v Scott (1%67) "C9: Facts E "r !cott is trustee of the !cott family trust, which owns a house in >reston E The beneficiaries of this trust are !cott family members E In &,4., !cott, in breach of trust, sells the >reston house and purchases a new one in "alvern in his own name from the trust E The purchase was financed partly by his own funds, partly by loan from a beneficiary, and party with trust money o In &,4., the purchase price is P&<00 o P&0&4 of this is trust money +70 per cent/ +$the misappropriated amount%/, being the amount obtained from the sale of the >reston house E !cott pays all this money bac1 to the trust +though with no interest/ E In the early &,70s, !cott dies, leaving the house to his second wife, who is not a beneficiary of the !cott family trust E In &,76, the house is valued at P-4-0 pounds E The other members of !cott%s family do not want !cott%s second wife to obtain the house E 4onse uently, the beneficiaries sue "rs !cott, claiming an e uitable interest in the house +for breach of trust/ o The plaintiff beneficiaries do not see1 restitution +they already have been paid the loan amount/ o They want to obtain some of the increased value and, if possible, a proprietary remedy over the house itself Issue E 4an the plaintiffs% trust money be traced into the "alvern houseF 3easoning E Tracing serves two related purposes' o 3estoring misappropriated trust money +!cott has done this/ o Accounting for profits generated through a breach of trust +underlies all of

fiduciary law/

E Bere, the increase in value represents profits made by the defaulting trusteeA it cannot be permitted to retain that value o The beneficiary, "rs !cott, is a volunteer and has no better title than the donor

+"r !cott/

E If the asset has been ac uired using only trust money +no other money/, the beneficiaries can trace into it and ta1e it bac1 in its entirety o This will be effected by declaring a constructive trust over the asset in favour of the beneficiary o The 4ourt will then order that the trust be carried out +discharged/ and the asset

transferred

E If trust money has been combined with other money and used to purchase an asset, the beneficiary will not be entitled to trace into the entirety of the asset o There are two rules for two types of cases o If the asset is $specifically severable% +when an asset can be split into the part deriving from the beneficiary%s wrongfully misappropriated property' eg, shares Inumbered share certificatesJ/, it will be divided in proportion to the beneficiaries% entitlement

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o If, however, the asset is not severable +eg, a house is not $specifically severable%/, a different rule applies R The beneficiary is entitled to a charge +or a lien/ over the asset to the e)tent necessary to secure repayment of the profits R The charge or lien will e)ist over the proportion of the asset%s total value

as was comprised by the proportion of the beneficiary%s money used to ac uire it

E Bere, the asset is not specifically severable, so the beneficiaries are only entitled to a charge over the house to the e)tent that the profit is attributable to the misappropriated trust money o 70 per cent of the purchase price was misappropriated trust money o The value is now P-4-0 o !cott had repaid the misappropriated funds o Therefore, only the proportional increase in value is recoverable o !o' the increase in value is R P-4-0 +current price/ K P&<00 +capital repaid/ S P6<-0 +total profit/ o Of this, the beneficiaries are entitled to 70 per cent +P..-0/ Decision E The plaintiffs can trace the trust money into the house E They are entitled to 70 per cent of the house%s current value, that being the proportion of their initial contribution to the purchase price, less what has already been repaid E An account of profits is ordered in the amount of the increased value of the "alvern house, as at the date of @udgment E The account of profits is secured by an e uitable lienA this ensures that, in the event that the beneficiaries are not repaid their share, the house can be sold off to apply that amount E An alternative remedy described as available by the 4ourt is that of constructive trust o A constructive trust could be imposed over the house in the amount of 70 per cent o The beneficiaries would have had a 70 per cent e uitable interest in the "alvern home o This would permit further increases in value to be apportioned in accordance with the beneficiaries% entitlement, and is a more fle)ible remedy o This would also allow the plaintiffs to postpone sale and obtain more money o +9aturally, though, this runs the ris1 of the house decreasing in value/ E The 4ourt orders the sale of the houseA the proceeds are gathered and distributed in the proportion of the parties% beneficial entitlements +70 per cent, 40 percent to the !cott family beneficiaries and the second wife, respectively/ E It is unclear whether the final value of the investment should be assessed as at the time of !cott%s death, or at the time of @udgment' the approach that appears to have been adopted is that values are fi)ed when the trial @udge delivers @udgment

!everal criticisms may be made of the outcome in !cott. (irst, it arguably encourages fiduciaries to breach their duties. A breaching fiduciary will remain entitled to whatever proportion of their wrongful investment as they themselves made. Only the proportion of the investment made with the investor%s money must be disgorged. This means that, even though the fiduciary may not have been able to ma1e the investment at all were it not for the +unwilling/ assistance of the beneficiaries, it will nevertheless be entitled to reap a share of the profits from that investment.

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!econd, although the plaintiffs in !cott only claimed an entitlement to a proportion of the profit 5 and not its entirety 5 the outcome has nevertheless been criticised as too generous to the fiduciary. !uch critics argue that the breaching fiduciary should only be entitled to recover their initial contribution 5 not its accrued value. !uch an approach would, it is argued, be more consistent with :arman v Dwyer and *oardman v >hipps, in that the fiduciary would not be entitled to any gain from their position, rather than the $proportional gain% permitted in !cott. There may be some scope for arguing this in an Australian court, given the basis . Tracing into windfalls on which !cott !uppose a solicitor wrongfully withdraws H..M0 from a client trust account. Be has committed was argued before the 4ourt.

a breach of trust and is liable to reimburse the trust that amount. 4learly, a beneficiary could :here solely the beneficiary%s money has been used to purchase an asset, the follow beneficiary may the money into the solicitor%s hands. Bowever, suppose also that he purchases a lottery tic1et with money, and wins. To how much, if any, of the H..Mm winnings is the beneficiary electthe to ta1e the asset completely. entitledF According to (os1ett v "c#eown +$(os1ett%/, the beneficiary would be entitled to trace into all specifically severable, the of it. 5here a trustee wrongfully uses trust money to provide part of the cost of acquiring an wronged beneficiary may elect ta1e the proportion the asset to which they asset, the beneficiary the is entitled at his option either to lottery claim a proportionate share of the In (os1ett, however, windfall wasto not a payout but a of matured life insurance policyA asset or to enforce a lien upon it to secure his personal claim against the trustee for the are entitled, the amount of the misapplied money! "t does not matter whether the trustee mi ed the trust money with his own in a singlein fund before using it toand acquire the asset, entitlement or made did not is beneficiaries were not clients but investorsA the beneficiary contribute &00 per cent including any increase value, providing that offset against any separate payments (whether simultaneously or sequentially) out of the differently owned of repayments made funds to acquire a single asset! (emphasis in original) the purchase price, but rather, 40 per cent. In these circumstances, the Bouse of ;ords held that by the trustee to the beneficiary. the beneficiary investors could trace into 40 per cent of the policy.
Fos*ett v 5cKeo0n (:111) "3: Facts E Timothy "urphy is a *ritish property developer E Be devises a property development scheme in >ortugal E In &,MM, several *ritish investors interested in the development enter into an agreement with "urphy, paying him +and some other trustees/ a total of P..7m E The development never proceeds, and "urphy and the other trustees misappropriate all

If the asset was partially ac uired with the trustee%s own money and is

If the asset not specifically severable, a charge, lien or constructive trust will be The rule is as is follows +at &6&/' awarded over the asset in proportion to the beneficiary%s deemed contribution.

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of the money for their own nefarious schemes E The investors discover this and want to reclaim their investmentA however, no trustee has the assets to satisfy the debt E Bowever, there is another possibility E "urphy had used P.0 000 of the trust money to pay off two premiums on his life insurance policy E The policy was first ta1en out in &,M7, and cost P&0 ..0 in premiums per year E "urphy paid a total of five annual premiums on this policy, the first two with his own money +$the &,M7 and &,M< payments%/ E The third +$the &,MM payment%/ is unclear' it may have been paid by "urphy or by the trust money E In &,M,, however, it is incontrovertible that the trust money was used, as it was in &,,0 E Thus, a total of P-0 000 in policy payments made, of which P.0 000 were misapplications of trust money E The terms of this policy provide P& 000 000 to the estate in the event of death E In &,,&, "urphy commits suicideA his wife and children receive the payment
E The investors argue that they are entitled to .?-t h s of the payout, because .?-t hs of the

premium payments can be traced through "urphy%s hands to the misappropriated trust money o They see1 to trace their P.0 000 into the P& 000 000 payout o That is, they claim a proprietary interest in P400 000 of the money in the account belonging to "urphy%s widow and children E "urphy%s widow and children were volunteers and will lose priority to a prior e uitable interest E 4ourt of Appeal' the investors can trace their investment money through the premium payments into "urphy%s insurance policyA an e uitable lien is granted over P.0 000 of the money, that being the amount of the policy paid using the investors% funds E The investors appeal to the Bouse of ;ords, arguing that they should be entitled to a share of the total proceeds from the policy in proportion to their contribution +ie P400 000/

Issue E 4an the investors trace into the payout from the life insurance policy in proportion to the premium payments made by "urphy using their misappropriate trust moneysF 3easoning E ;ord *rowneK:il1inson' o $The uestion which arises in this case is whether, for tracing purposes, the payments of the fourth and fifth premiums on a policy which, up to that date, had been the sole property of the children for tracing purposes fall to be treated as analogous to the e)penditure of cash on the physical property of another or as analogous to the mi)ture of moneys in a ban1 account.% o This uestion should be resolved in favour of the latter option' the contributions to the premium were more a1in to payments into a mi)ed fund o 4onse uently, the whole of the mi)ed fund is held sub@ect to an e uitable charge

in proportion to the investors% contributions +40 per cent/

E ;ord "illett' o $"y ;ords, this is a te)tboo1 e)ample of tracing through mi)ed substitutions% R (irst, the property was held on e)press trust for the plaintiffs in "urphy%s ban1 account R !econd, the money became $ine)tricably mi)ed% through with "urphy%s own money through various transactions and transferrals R Third, the trust money became $an indistinguishable part of a chose in action, viQ, the debt prospectively and contingently due from an

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insurance company to its policyholders% R (ourth, the trust money forms $an indistinguishable part of the balance

standing to the credit of the respondent trustees in their ban1 account.%

o A distinction must be drawn between tracing and following $I&.<J R (ollowing is the process of following the same asset as it moves from hand to hand% +in an unchanged form/ $I&.<J R Tracing is the process of identifying a new asset as the substitute for the old% +by some transactional transformation, or change in value/ R The plaintiffs see1 to trace the money at each stage into the proceeds,

being a debt due from the ban1 to the account holder and a debt due from the insurance company to the policy holders

o Tracing is a matter of property law, but is neither doctrine nor remedy' it is merely a techni ue for finding value R $The claimant succeeds if at all by virtue of his own title, not to reverse un@ust enrichment. >roperty rights are determined by fi)ed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is Tfair, @ust and reasonableU. !uch concepts, which in reality mas1 decisions of legal policy, have no place in the law of property.% R Tracing involves finding value, not assets' at &.M $I&.MJ R Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and @ustifies his claim that the proceeds can properly be regarded as representing his property.% $I&.MJ R Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant%s property. It enables the claimant to substitute the traceable proceeds for the original asset as the sub@ect matter of his claim. *ut it does not affect or establish his claim.% R The property law claim subse uent to tracing may be sub@ect to defences as a result of, for e)ample, a good faith purchase in the intervening transactions sufficient to e)tinguish title R $The successful completion of a tracing e)ercise may be preliminary to a

personal claim +as in 2l A@ou v Dollar ;and Boldings plc V/ or a proprietary one, to the enforcement of a legal right +as in Trustees of the >roperty of ( 4 0ones D !ons v 0ones V/ or an e uitable one.%

o *ecause of its nature, tracing rules at common law and in e uity should be fused R $Niven its nature, there is nothing inherently legal or e uitable about the tracing e)ercise. There is thus no sense in maintaining different rules for tracing at law and in e uity. One set of tracing rules is enough.% R The two approaches should be merged into a set of $unitary tracing rules% R If tracing is simply a process of identifying the plaintiff%s money in the defendant%s hands, why should it differ depending on whether it proceeds at law or in e uityF R I4f "eagher, Nummow and ;ehane' fusion fallacyJ o Tracing is not a cause of action $I&.,J R V a plaintiff who brings an action li1e the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. Be may, for e)ample, have paid full value for the property, but he is still re uired to disgorge it if he received it with

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notice of the plaintiff%s interest.% $I&.,J R (urthermore, a claim in un@ust enrichment is sub@ect to a change of position defence, which usually operates by reducing or e)tinguishing the element of enrichment. An action li1e the present is sub@ect to the bona fide purchaser for value defence, which operates to clear the defendants title! R This suggests that change of position is not available as a defence to a

claim based in property law, but good faith purchase is

o *asic principles of tracing R Ac uisition of an asset wholly with misappropriated trust money' E *eneficiary entitled $at his option% to assert beneficial ownership of the asset or claim in breach of trust and enforce an e uitable lien or charge over it to secure restoration E If the proceeds have increased in value, beneficial ownership should be asserted to obtain that profit E The trustee cannot 1eep any profit resulting from this misappropriation for himself E (urther, his donees cannot obtain better title than their donor E If, however, the proceeds are worth less than the misappropriated money, $it does not usually matter how the beneficiary e)ercises his option IsinceJ IhJe will ta1e the whole of the proceeds on either basis% +though presumably a breach of trust action would entitle the claimant to e uitable compensation for the full value of the loss/ E *oth claims are proprietary' tracing into the proceeds is an essential precondition to their success E (ailure to trace limits the claimant to a personal claim against the trustee E Bowever, a proprietary claim can be maintained against the breaching fiduciary and anyone who derives title from him, e)cept a bona fide purchaser for value without notice of the breach of trust R Ac uisition of an assert with mi)ed funds' E *eneficiary has the option of ta1ing a proportionate part of the new property or a lien upon it, $as may be most for his advantage% E $In every case the value formerly inherent in the trust property has become located within the value inherent in the new asset.% E !ir Neorge 0essel "3 appears to have implied in In re Ballett%s Estate6 7natchbull v -allett that the remedy is limited to a lien E This is not the case' at &6& E $I&6&J :here a trustee wrongfully uses trust money to provide part of the cost of ac uiring an asset, the beneficiary is entitled

at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money! "t does not matter whether the trustee mi ed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset! 9o fiduciary relationship is necessary in order to trace, and any such (emphasis in original)

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re uirement, if it e)ists, should be abolished R This follows from a fusion of law and e uity +tracing should not depend on the e)istence of a particular class of e uitable relationship/ R Tracing is part of the law of property, not the law of un@ust enrichment R I4f ;ionel !mith' tracing belongs to the law of un@ust enrichmentA here, the children should be viewed as having been un@ustly enriched by an insurance policy purchased with the beneficiaries% moneyJ R The present appeal is a property law claim' the investors see1 return of

their P.0 000, including any accrued value

o These distinctions are most relevant to defences' R If tracing is a claim in un@ust enrichment, a possible defence is good faith change of position E Thus if, for e)ample, the children decided to spend their windfall in some way, they would be protected under this defence R Bowever, by treating the claim as one of property, no defence is available E The children are not purchasers, so the bona fide purchaser for value without notice defence does not apply R I:ere the Bigh 4ourt to consider the issue, it would most li1ely follow

;ord "illett in this regard' there is $considerable hostility% towards un@ust enrichmentJ

o In the result, then, this is $a straightforward case% of misappropriated trust money, later mi)ed with "urphy%s own money and used to purchase an asset for the benefit of his wife and children R The fact that "urphy died, and the other of events, does not alter the fact that his widow and children are volunteers in e uity R They did not pay consideration for the policy, instead ta1ing its benefits as a gift, paid for in part with misappropriated trust money R :hen the policy matures +becomes payable/, the resulting payout o :hen did "urphy ac uire his rights under the insurance policyF $I&64J R It is V of critical importance in the present case to appreciate that the plaintiffs do not trace the premiums directly into the insurance money. They trace them first into the policy and thence into the proceeds of the policy. It is essential not to elide the two steps.% R There are two stages to the ac uisition of rights R (irst, tracing from "urphy%s premium payments to the ac uired rights under the contract +a chose in action/ R !econd, tracing from the ac uired rights to the final policy payment in e)change for giving up those rights $I&64J R It follows that, if a claimant can show that premiums were paid with his money, he can claim a proportionate share of the policy.% R This is because the nature of the interest does not affect the application

represents proceeds traceable to the misappropriated funds

of tracing principles' the same tracing rules apply whether the asset is a life insurance policy, ban1 account or lottery tic1et

o The defendants argue that if the rights came on foot in &,M7, the trust moneys were not used to appropriate the rights R "a@ority' no, as a matter of insurance contract law, the trust moneys ere used to ac uire the rights R "inority' yes, the rights were ac uired by the earlier +nonKtrust/ payments, so no tracing is possible

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o The beneficiaries have a beneficial interest in the trust moneyA this interest binds

not only "urphy but also his successors in title, including volunteers who either receive trust property or its traceable proceeds interest and the 1ind of proceeds

o The relief granted to uphold this e uitable title will depend on the nature of the o :here the beneficiary can trace and claim the asset, they have two options' R (irst, they can claim a proportionate share of the asset +declaring a constructive trust/ R !econd, they can see1 repayment of the trust money +or an account of profits 5 see !cott v !cott/ secured by a charge or lien R The plaintiff must elect between these options Decision
E +6'./ The investors will receive P400 000 +being .?-t hs of the total amount gained through

the misappropriation/ E "a@ority' ;ords *rowneK:il1inson, Boffmann and "illett o In form, the remedy is an account of profits o Bowever, in substance, a constructive trust is awarded' a $proportionate share% o I4f !cott' here a constructive trust is actually awardedJ o IIn general, a constructive trust should be sought where the investment has the potential to further increase in value after the date of @udgmentJ E "inority' ;ords !teyn and Bope of 4raighead o The investors are @ust entitled to restitution of the misapplied money +being P.0 440/ by way of e uitable lien

4cott highlights the two competing approaches to tracing. punishment of a wrong (breach of fiduciary duty and prevention of profit) or simply the return of property and enforcement of property rights! The ma#ority in 8oskett favours a property rights view. tracing is simply a mechanism for determining e isting property rights (and in any case, fiduciaries should not benefit from their breaches)! The ma#ority considers fairness and #ustice (whether effect is proportionate 8oskett represents the more modern view of tracing! The -ighthe %ourt would, faced with to a the similar defendants wrong, etc)! case, probably follow 8oskett over 4cott! ( constructive trust would probably be available! 9erhaps the best e planation of the rationale in 8oskett is provided by the following e tract 5here ( misappropriates 's money and uses it to buy a winning ticket in the lottery, ' is from entitled to the winnings! 4ince ( is a wrongdoer, it is irrelevant that he could have used his own money if in fact he used 's! This may seem to give ' an undeserved windfall, the #udgment of *ord &illett.
but the result is not un#ust! -ad ' discovered the fraud before the draw, he could have decided whether to keep the ticket or demand his money back! -e alone has the right to decide whether to gamble with his own money! "f ( keeps him in ignorance until after the draw, he suffers the consequence! -e cannot deprive ' of his right to choose what to do with his own money6 but he can give him an informed choice!

Although persuasive, there are some problems with this analysis. >resumably, for e)ample, it suggests that, if * does learn of the misappropriation prior to the draw but chooses to stay silent,

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and the tic1et subse uently turns out to be a losing tic1et, * will no longer be able to claim entitlement to compensation for the misappropriated funds, since * has effectively chosen to $gamble with his own money%. Bowever, this is to do one of two things that, if not wrong, at least warrant e)planation' +i/ to import a mental element into the definition of a tracing rightA or +ii/ to bar a claimant by election from proceeding with a common law claim founded in tracing. It is unclear whether these are necessary merely unintended conse uences of ;ord "illett%s -ad :the plaintiffs; discovered what had or happened before &r &urphy died, they would analysis. have intervened! They might or might not have elected to take an interest in the policy
rather than enforce a lien for the return of premiums paid with their money $! (t the date of his death &r &urphy was only )< and a non=smoker! -e had a life e pectancy of Bowever, "illett doeswould anticipate these ob@ections, tofor an e)tent' many ;ord years $! The plaintiffs hardly have been prepared to wait years to recover their money, paying the premiums in the meantime! $ They would obviously have chosen to enforce their lien to recover the premiums or have sought a declaration that the trustees held the policy for &r &urphys children and themselves as tenants in common in the appropriate shares! $ "n practice the trustees were able to obtain the death benefit by maintaining the policy until &r &urphys death only because the plaintiffs were kept in ignorance of the fact that premiums had been paid with their money and so were unable to intervene!

6 !ubse uent criticism

In his scholarly case note, published shortly after the decision in (os1ett v "c#eown, Alan *erg made several criticisms of the ma@ority reasoning. The conse uence of the decision, argues *erg, is that a beneficiary can only claim a proportionate share of profit and not its entirety. Although the position in the 8nited !tates and Australia +see !cott v !cott/, this reasoning is faulty because it permits the breaching fiduciary himself to retain a proportionate share of the profits. It may be contrasted with the situation where an ac uisition occurs on the basis of information obtained by a fiduciary in the course of his duties' such a fiduciary, in breach, would need to account for the entirety of the profits, not @ust some fraction corresponding to the amount of the principal%s money. 4ases li1e (os1ett and !cott therefore permit the fiduciary +or, in (os1ett, the heirs/ to retain too much of the money. The beneficiaries +in (os1ett, the investors/ should be entitled to the whole profit e)cept the amount of the fiduciary%s own contribution. This would be more consistent with the $no profit% rule in #eech v !anford and *oardman v >hipps. 2 uity should treat a breaching fiduciary according to the $good man% theory of e uity, pretending that the profit was not obtained for himself as principal but instead as a conscientious trustee acting for the beneficiary. Bowever, this stricter position was not argued in (os1ett. 4ertainly, it would seem unfair to the heirs light of >age the &, circumstances 5 visiting upon them the sins of their father. Instead, the = 0aani in 3iordan .007 of 6- http'??www.@aani.net? focus was on the $wholly unwarranted windfall% that was said to be received by the investors if they were granted a share of the policy payout. 9evertheless, even had the investors argued for the stricter position, the heirs could have argued that the policy would still have been received even without the last two premiums +since the policy had by that stage a standing period of two years in which a payout would be received despite nonKpayment/. Arguments about intention, trustees not profiting from their trusts, and financial regulatory policy may be raised in reply.

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(urther, it is argued, the children in (os1ett, and the trustee in !cott, are volunteers, so there should be no @ustification for allowing them to retain their illKgotten gains. *erg also noes that $ItJheir ;ordships stood counsel%s arguments on their heads.%- Apparently, the plaintiffs succeeded precisely because the 4ourt re@ected their argument about e uitable principles in favour of the defendant%s view that the case was about property rights. According to *erg, the Bouse of ;ords should have adopted a stricter approach that 2 would Dividing Calue among "ultiple *eneficiaries remove anysituation possible incentive for a trustee to misappropriate funds and The archetypal involving multiple beneficiaries arises where a solicitor, acting mi) themmisapplies with hismoney or her dishonestly, in a trust account belonging to multiple clients. The money belongs uitywa1e to the clients, and they will be entitled to traceand into its proceeds. Bowever, own. in Ine the of financial mismanagement largeKscale corporate consider the situation in which some of the money has been lost or dissipated. The issue here is collapses, in a money period of be divided among the beneficiaries. how the remaining should everKdeteriorating business ethics and everKincreasing temptations, In 3e !tenning +&M,M/ the 4ourt of imposing high standards of4hancery applied the rule in 4layton%s 4ase. !tenning, a dishonest solicitor, appropriated money belonging to "rs !mith and four other clients. *ecause conduct upon fiduciaries never more important. "rs !mith%s money was the firsthas money paid been into the account, hers was deemed the first paid
out. Austin !cott has described the rule in 4layton%s 4ase as li1e $an unruly dog that has been "urphy%s widow and allowed 5hereoutside theand beneficiarys claim is ina competition withwrea1 the claims of other innocent children, declare constructive trust in favour of main the investors over to wander the common law and in@ustice in e uity%. The criticism is that it contributors, there is no basis upon which any of the claims can be subordinated to any is of the others! 5here the fund is deficient, the beneficiary is not entitled to enforce a lien the remaining P,7, 640. for his contributions6 all must share rateably in the fund! arbitrary. There is no reason why "rs !mith should lose her money as against the other clients.

The correct outcome in (os1ett was to order repayment of P60 770 to

The difference between *erg and supporters of (os1ett may largelyBis be In (os1ett v "c#eown, ;ord "illett returned to the ma)im ae uitas est ae ualitas. ;ordship e)plained by sympathy for!outh :ales. "ore recently, see #eefe v ;aw !ociety of 9ew decided that multiple beneficiaries would share rateably in the traceable proceeds, that is, in the fiduciary%s children. !upporters should bear Alan *erg, $>ermitting a Trustee to 3etain a >rofit% +.00&/ &&< ;aw Wuarterly 3eview 677, 67<. in mind that the children proportion to the amount of their contributions'
7 I.00&J & A4 &6. +;ord "illett/.

The primary rule in regard to a mi ed fund, therefore, is that gains and losses are borne by the contributors rateably!1

did receive P700 000. The issue is' to how much of the profit should the children be entitledF = 0aani 3iordan .007 >age .0 of 6- http'??www.@aani.net? !ome portion of it, or noneF >rofessor *ryan supports *erg%s view +none, sub@ect to return of the premium payments/.

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Kee4e v 3a0 Soc'ety o4 Ne0 Sout& Wales (1%%8) NSW SC: Facts E #eefe, a solicitor, misapplies client money for private purposes E The misappropriation is discovered, and the ;aw !ociety suspends him from practice E Bowever, his account does not now possess sufficient funds to meet all the clients% claims for recovery against him Issue E Bow are the available funds to be divided as between the entitled beneficiariesF Decision E The 4ourt refuses to apply 4layton%s 4ase, instead applying ;ord "illett%s principle of $rateable distribution% E 2ach client should have a rateable share of the surviving money in the account E Thus, if client A had had H-00 ta1en from him, and client * H.-0, and the account had only H&-0 remaining in it, client A would receive H&00 and client * H-0, regardless of the order in which money was withdrawn

This is a similar principle to that which applies in ban1ruptcy proceedings.

( "i)ing by 3ecipients from the (iduciary

This category of case concerns situations where a third party conducts the mi)ing, not the breaching fiduciary. If the third party is aware of the breach of duty, the third party can be in no better position than the fiduciary. This means that if the plaintiff can trace the & "i)ing for value' tracing not possible money into the fiduciary%s account, it can alsoreceives trace the money the handsfor of the a third party If, for e)ample, the third party money as into consideration provision with notice of goods to of thethe plaintiff%s fiduciary, interest asthe beneficiary. Bowever, if the third party faith is a bona fide breaching money cannot be traced +being a good receipt of purchaser for value value/. Bowever, . "i)ing by a volunteer' tracing possible without notice, tracing will be could possible. the beneficiary, in such a not case, trace into the goods themselves, which If, however, the third party is an innocent volunteer 5 having paid no consideration for the would be held by money the fiduciary. +Bere, the goods form consideration for the money./ from the fiduciary duty, and being ignorant of any breach 5 who mi)es the fiduciary%s money
with his own, a different rule will apply. The beneficiary will be rateably entitled, as against the third party, to any remaining money in the third party%s account, or to any property purchased with such = 0aani 3iordan .007 >age .& of 6- http'??www.@aani.net? money. This argument was considered and accepted in 3e Diploc1.

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!e 6';loc* (1%78) UK C9: Facts E In addition to the personal claim considered previously, the beneficiaries also claim a proprietary remedy against the wrongful beneficiaries E They argue that they could trace their entitlements into the charities% accounts E The charities had, in good faith, mi)ed the estate%s money into their own accounts Issue E 4an the estate trace into the funds mi)ed by the recipient charitiesF Decision E The beneficiaries and charities are rateably entitled to the money in the latter%s ban1 accounts E They are also rateable entitled to any property purchased with that money E An e uitable lien can be imposed over the property in the beneficiaries% favour, though not a constructive trust

6 "oney used to improve the property' cannot be traced

In 3e Diploc1, at least one hospital used beneficiary money to improve its children%s wards. +Aw1wardly, it also renamed them the $#aleb% and $Diploc1% wards./ The Bouse of ;ords held that it would be ine uitable to trace into the children%s wards. This is because when property is improved, it is impossible to separate the beneficiary%s money in the improved property. A single bric1 or window pane cannot be pointed to and it said with confident, $that was purchased with the beneficiary%s money%.
4 A note about remedies

An e uitable lien was not granted over the property as a whole, because the precise portion of it that was the beneficiaries% money could not be identified. Bowever, if a specific building was Alternatively, in a case li1e (os1ett, where the constructive trust is over money, the plaintiffs can constructed on of vacant land, situation may be different. "ere e)tension +eg, a elect to claim their share the money or 1eep the it invested in the original trust. new wing/ is not sufficiently discrete to create separately identifiable property belonging to the beneficiaries.
*eneficiaries under a constructive trust are able to compel sale of the sub@ect property by order of the 4ourt, sub@ect to a discretion to disallow sale in circumstances where it would be disruptive to the occupants. This means that if a constructive trust is granted over a portion of an indivisible asset, the plaintiffbeneficiary will normally be entitled to insist upon sale to realise their interest, regardless of the defendantfiduciary%s protestations. = 0aani 3iordan .007 >age .. of 6- http'??www.@aani.net?

This result may also be rationalised on the basis of change of position' the hospital relied on the fact of receipt to incur debts in construction and renovation which it would not otherwise have assumed. +Of course, such a rationale must be uestioned if tracing is part of the law of property, not restitution./

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III .e(ences
A Nood (aith >urchaser for Calue without 9otice

A defendant who has received assets traceable to the plaintiff will nonetheless be entitled to retain title in those assets if they can establish an e uitable defence. This will be so where, inter alia, the defendant is a bona fide purchaser of the asset for consideration without notice of the breach of fiduciary duty or the plaintiff%s e uitable interest in the asset. (or e)ample, suppose * a Dissipation fiduciary, (, is entrusted with legal title to a Col1swagen *eetle held for Tracing ends at the point assets are dissipated. This means that if the defendant, having the benefit *,a the beneficiary. 9ow further suppose (, in not breach of received assetsof from breaching fiduciary, has already dissipated them, that tracing will be duty, decides to sell the available to the principal. car to X, who unwittingly purchases it for H60 000. * cannot trace into the Dissipation in several ways' 4onsuming the occur asset +eg, setting off the firewor1sA drin1ing the wine/A carE for e can uitable relief E Nifting the asset to unidentifiable parties +eg, donating the money to beggars/A against X. the This because a purchaser, having provided value for the E Transferring asset tois unreachable partiesX +eg,is moving the money to a !wiss ban1 account/A asset. 4learly, E Nambling the asset +eg, gambling the money away at a casino in 3io de 0aneiro/A E !pending the by distributing it to many recipients going on an overseas as consideration by (, and however, *asset can trace into the H60 +eg, 000 received holidayA throwing a lavish party/A et cetera. any asset This that an honest voluntary recipient of money dubiousthe in subsesuggests uently ac uired with it but 5 such as a new "ercedes 5 assuming origin moneyshould has not uic1ly been spend the money for some irreversible purpose, or wash their hands of it in dissipated. some other way. Bowever, although the third party defendant may have no money capable of 4 >ayment of a Debt being traced, they may be personally liable 1nowing assets receipt under limb of If the still third party defendant has used for the fiduciary%s to repay a the debt,first it will not be *arnes v Addy, if their traceable by the plaintiff. This is because money usedor to discharge a debt cannot be traceda +3e Diploc1/. suspicions are sufficiently raised if, in the circumstances, reasonable In 3e Diploc1, this was held to be the case in relation to both unsecured +eg, ordinary loans/ and person would have secured +ie, mortgaged/ debts. 1nown what was going on. :hether this personal liability may be established will depend on the = 0aani 3iordan .007 >age .6 of 6- http'??www.@aani.net? standard of 1nowledge re uired of the defendant, and the e)tent of his or her actual 1nowledge.

The issue arose in 3e Diploc1 because some money was also given to the Bermitage 4raft !chool, and the money used to pay off debts. The 4ourt of Appeal held, and the Bouse of ;ords confirmed, that it is impossible to trace into the payment of a debt. Equity and Trusts 04 Tracing The rule in 3e Diploc1 remains controversial. (or e)ample, ;ionel !mith, a leading 4anadian tracing scholar, argues that tracing should not end upon payment of a debt. Instead, tracing into debts should be possibleA the 4ourt should simply as1, $how was the debt incurredF% If the debt was incurred prior to the distribution, and used to purchase fi)ed asses, the beneficiaries should be entitled to a rateable share. If, for e)ample, X incurred the debt by ac uiring an asset under contract 5 for e)ample, the Col1swagen 5 the plaintiff should be able to trace into that asset notwithstanding that the assets the sub@ect of the fiduciary relationship have since been used to discharge the debt to which it was held sub@ect. Thus, instead of tracing into the third party, the tracing can $@ump% +whether by subrogation, or otherwise/ directly to the freestanding asset ac uired as a result of discharging the debt. This is an e)ample of bac1ward tracing +since X may have purchased the car prior to <ertsc& v 9tsas (1%%%) NSW SC: receiving the assets of the fiduciary/. !uch an approach therefore poses problems Facts for E continuity X%s will is forgedA X dies >ursuant to the forged will, Bamilton is wrongly paid H&00 000 of E title. E Bamilton uses H7M 000 to repay the mortgage over her home and dissipates the
remainder

>ayment of a secured debt is also possible. This will be necessary if the fiduciary assets are applied to lessen or discharge a mortgage over a home. (or e)ample, other 3easoning E The beneficiary stands in the shoes of the original lender by subrogation money in 3e Diploc1 E Thus, instead of owing H7M 000 to the ban1, "s Bamilton now owes that amount to the beneficiary was paid to the ;eaf Bomeopathic Bospital, which used the money to pay off a E This is an e)ample of subrogation, an e uitable doctrine allowing one party to be mortgage. The for another deemed substituted 4ourt held that it was not possible to trace into the payment of a secured debt +the Decision mortgage/. E Application of the fiduciary assets to discharge the secured loan is not fatal to tracing This result has also been criticised as denying the beneficiaries the chance to ta1e over the = 0aani 3iordan .007 >age .4 of 6- http'??www.@aani.net? mortgage by way of subrogation, an e uitable remedy that allows a party to $stand in the shoes of% another.
Issue E 4an the estate trace into the H7M 000 paid by "s Bamilton to the ban1F

In Australia, the !upreme 4ourt of 9ew !outh :ales permitted tracing of this nature in Nertsch v Atsas. In that case, the 4ourt allowed subrogation in lieu of tracing, holding that the true beneficiaries were entitled to ta1e over a mortgage as if they were mortgagees of the house, so

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D :here Ine uitable to Nrant a >roprietary 3emedy

,e +iplock holds still further surprises! ( hospital was one of the 0>? charities to receive a portion of the +iplock estate under the invalid will! This hospital used that money to make improvements to the childrens ward, including constructing an e tension! The hospital was personally liable to repay the wrongfully received money6 however, tracing into the improvements was not possible! This defence is not a result of unfairness or in#ustice! 2 Nood (aith 4hange >osition ,ather, at a conceptual level, itofis impossible to identify with any precision the property into which Arguably, change of position should only be recognised as a defence to tracing if theconceptual plaintiffs money went (see above)! its
foundation lies in un@ust enrichment. If the basis of tracing is simply property -owever, ,e +iplock is authority for the proposition that tracing may be law, strict liability applies' when returnit of refused is property possessed under invalid title can be compelled regardless ofto the use tothe money received! This is essentially synonymous to inequitable repay which it is put the defence of by its possessor. If, as ;ord "illet has stated, tracing is part of property there change law, of position! ,eferences to inequitability have largely been can be no role the defence interpreted asfor references to of change of position.

change of position 3 the language of fairness is simply being substituted for An +though perhaps uestionable/ view is that tracing derives from the the alternative language of law of un@ust <ertsc& v 9tsas (1%%%) NSW SC: un#ust enrichment!
Facts E In addition to the conduct described above, the wrongful recipient, "s Bamilton, also gives up her @ob as a ta)i driver to become a university student

enrichment. A defence of change of position would therefore be defensible. This is because the essence of the plaintiff%s claim is that the third party has been un@ustly enriched at Issue their e)pense. E Bas "s Bamilton changed her position to her detriment such as to entitle her to retain the law wrongfully proceedsF In the of received un@ust enrichment, change of position is a complete defenceA as where, for e)ample, Decision E Ges, this amounts to a good faith change of position, to her detriment the un@ustly enriched recipient of fiduciary assets has in good faith applied them to some purpose such as to be no longer enriched. Accordingly, the defence of change of position = 0aani 3iordan .007 >age .- of 6- http'??www.@aani.net? applies if this is the conceptual foundation of tracing. In any event, so much appears to have been accepted by the !upreme 4ourt of 9ew !outh :ales in Nertsch v Atsas.

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E *ecoming a university student is arguably not a longKterm detriment since it enhances employability E Bowever, in terms of her immediate wealth, she is poorer

The 4ourt simply appears to have presumed that change of position is available as a defence to a tracing claim. The availability of change of position as a defence to tracing has been neither confirmed nor denied by the Bigh 4ourt of Australia. Its availability seems li1ely to depend on the view that is ta1en of its conceptual basis. The Bigh 4ourt will probably side with ;ord "illett%s property law 3';*'n <orman (a 4'rm) v Kar;nale 3t+ (1%%1) "3: view rather than a restitution approach. Therefore, the defence is unli1ely to Facts apply. E "r 4ass is a partner in ;ip1in Norman, a firm of solicitors In the 8nited #ingdom, an authoritative statement of the law of change of position has been given. The issue arose in relation to a claim involving tracing, but at a time when the basis was regarded as restitutionary. The case is ;ip1in Norman +a firm/ v #arpnale ;td +$;ip1in Norman%/, Issue E 4an the firm trace into the casino%s ban1 accountF and concerns the liability of a recipient casino to return property misappropriated 3easoning and E ;ord Noff' subse uently gambled the agent. The casino%s argument that it o In misappropriating the by money from plaintiff%s the client account, 4ass committed a clear breach of fiduciary duty changedo its position The fact that 4ass may have mi)ed the client money in his own account before it is unproblematic on faith of gambling the gambler%s bets is re@ected.
R $even if legal title to the money did vest in 4ass immediately on receipt, nevertheless he would have held it on trust for his partners, who would accordingly have been entitled to trace it in e uity into the hands of the respondents.% R The enrichment of the club was at the e)pense of the solicitors o :hen 4ass lost the P&-4 7,- gambling at the respondent%s casino, he completed a gift of that amount to the club o The casino%s argument is that it had accepted the money and innocently changed its position to its detriment by allowing 4ass to gamble and paying him E 4ass misappropriates funds from the firm%s client account and e)hausts much of it while gambling at $the >layboy 4lub%, a private casino owned by #arpnale ;td o !ome P&<4 <4- are gambled at the casino o P.0 0-0 of this money is from 4ass% own account o The remaining P&-4 7,- was stolen from the client account o The casino is clearly a volunteer, not having given consideration for the money E The firm see1s recovery of the money from the casinoA otherwise it must replenish the client account itself E The firm argues that it has an in personam right to recovery of the money from the casino

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winnings A R bona fide change of position is a good defence to a tracing claim, providing such a change ma1es it in e uitable to re uire restitution +ie, there is a relevant detriment/ R Bere, however, there has not been any detriment E ;ord Templeman' o $The club has not suffered any detriment. If the club pays P&-4 7,- to the solicitors as a result of this appeal, the club will be in e)actly the same position which IitJ would have obtained if 4ass had not gambled away the solicitors% money. It is true that the club would have been in a better position if 4ass had been gambling away his own money, but that plaintiff observation does not entitle the club to retain the solicitors% money by which the club remains un@ustly enriched to the e)tent of P&-4 7,-.% Decision E The casino%s change of position defence is to be re@ected E The firm is entitled to recover the entire amount received by the casino from "r 4ass, less the amount paid by the club to "r 4ass in winnings

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IV Re)edies
A Introduction

As ;ord "illett noted in (os1ett v "c#eown, it should be borne in mind that tracing is neither claim nor remedy, but rather a process of establishing proprietary entitlement. (or this reason, the following remedies are more accurately described as * 2lection to Ta1e >roperty remedies to a property The plaintiff elect at to law ta1eor property in the hands. uent This is a law claim 5may whether in e uity 5 defendant%s rather than conse upon narrow remedyA it only successful tracing. applies in tracing circumstances where plaintiff%s property has been e)changed Although is necessary to the establish the rights re uired to support these for that of it another remedies, is not party. (orwithout this reason, it is rarely used. sufficient an independent cause of action.
4v 2 uitable ;ien the plaintiff%s money was misapplied to (or e)ample, in Taylor >lumer, gold bullion instead of :here property has fallen in value, an e uitable lien may be imposed over shares. The plaintiff%s property +money/ was e)changed for another 1ind of the defendant%s property +gold/. remaining assets, including any property held. It amounts to an order to sell 4onse uently, the plaintiff could, if he chose, elect to ta1e the gold. This is off the property, useful if the value of entitling the plaintiff to return of the value of their property. the e)changed property has risen relative to the value of the original property. If the value of the defendant%s assets is less than the amount of which the plaintiff has been deprived, the lien will only apply to the e)tent that it can be satisfied by sale of the property. ;iens D Account of >rofits are not plaintiff%s $e uitable asset magic% capable of creating value. The between If the has appreciated in value while indifference the hands of the the uantum the of defendant, an of account lien and the amount owed will be made up byentitle way of a the personal remedy. profits may be obtained by the plaintiff. This will it to full +increased/ This is e)ample of a value ofan the property. Calue is assessed as of the date @udgment +but not postK@udgment/. situation where tracing is insufficient toof secure recovery.
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An account of profits will often be secured by an e security, uitable lien. !ee, eg, v (urther, because liens are intended to provide it does not!cott ma1e !cott. sense to see1 their

imposition over floating assets, such as shares or debentures. ;iens should only be sought over fi)ed and stable assets, preferably real property.

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2 4onstructive or 3esulting Trust

The most popular remedy is that of constructive trust. It entitles a plaintiff to a proportionate share of property held by the defendant. The actual value of the share will vary with the value of the asset. It is useful where the value of the property is li1ely to increase after @udgment. !ee, in effect, (os1ett, where what in essence was a constructive trust was granted over the life insurance policy in proportion to the beneficiaries% .?- t h share. Although the remedy was couched in terms of an account of profits, the beneficiaries% interest was more a1in to a constructive trust. !ome scholars argue that the trust imposed as a tracing remedy is better classified as a resulting trust. To some e)tent, however, the remedy%s classification is irrelevant, as its incidents are well 1nown.

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V /&#othetica
A >roblem 7
& Is there a fiduciary relationshipF +a/ >resumed E *usiness partners o (ormal agreement is missing E Trustee of trust money +H.000/ o Is it supposed to be a trust accountF o Is he trustee of that accountF o This argument is possible E Agentprincipal o :ea1er E 2mployeeemployer o Cery wea1 since they share the profits +b/ (actual E BoriQontal relationship' similar to a @oint venture o 8D4 v *ryan test applies' no contract signed, so test is $mutual trust and confidence% o (actors' R;ac1 of formality suggests trust E 3estaurant meeting E 9ap1in notes E Bowever, this may militate against a fiduciary relationship 5 didn%t protect their interests but could have +;A4 "inerals v 4orona minority/ R;ac1 of consultation with solicitors RBanding over money without any security R (riends RBowever, Andrew must approve changes to the business plan E !uggests lac1 of trust o Other tests' Bospital >roducts R 8nderta1ing E *ill has underta1en to run the business and give her a share of the profits R Culnerability E 4learly established' *ill has the capacity to affect Andrea%s interests E There is probably a factual fiduciary relationship

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. The @oint account money +a/ *reach of fiduciary duty E 4lear breach +4han v LachariaA *oardman v >hipps/ o 9o profit' appropriated for his own purposes o 9o conflict' didn%t put it into the account as promised E 2 uitable compensation, a personal remedy, is available to compensate A for the breach of duty +b/ Account of profits E *etter than compensation +H.000/ since * made a profit E >ersonal remedy E !ecure by charge or lienF E 2lect to ta1e sharesF E "ust show connection between money +tracing relevant/ E "i)ing o 3e Ballett%s 2state' * uses his money first R Only H-00 o 3e Oatway' best result would be to deem H.000 of the H.-00 purchase of shares to have been derived from A%s funds R>resumption is that the successful investment belongs to the principal R Thus, A has a 4?-t h share in the shares +!cottA 8oskett. entitled to a prorated interest) o 3emedy RAccount of profits assessed at the date of @udgment' H4000, secured by an e uitable lien R Alternatively, elect to ta1e 4?-th s of the shares ROr a constructive trust over the shares +since they might further rise in value/ E Doubled in valueA li1ely to continue rising E Bowever, if the mar1et is uncertain and the shares could fall in value, sale of the shares should be compelled uic1ly so that A can realise her H4000 E This remedy is ris1ier than the others,

since A bears the ris1 that the mar1et will fall

E Alternatively' o !ince fiduciaries should not benefit at all from their breaches, * should be entitled to the full increase in value of the shares o A must simply return the H-00 of *%s money used to purchase them o 9ot directly argued in !cott v !cott, but possible in a theoretical sense o This would vest a full beneficial in the asset by way of constructive trust o

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E *ill would argue' o Debit the fiduciary with all fund dissipation +Oatway and -allett) o Bowever, no dissipation here o !o the fiduciary debits their own money first o Thus, H&000 of *ill%s money went into the shares, then H&-00 of A%s money
o 4onse uently, A would only have a 6?-th share in

compensation, or an election to ta1e that share o Bowever, wea1er since cases prefer to deliver the best outcome possible for the fiduciary o +And A would also be entitled to the H-00 still in *%s ban1

account, which would be deemed to be hers/

E Allowance for 1nowledge and s1ill' choosing the shares o ;i1ely to be very small here +c/ 4onstructive trust E 6 The *runswic1 business +a/ *reaches' accepting the H&0 000 E *riberyF o Impacts upon remedies o ;ister' no proprietary remedy over money R4an obtain a personal remedy RBowever, cannot trace into its proceeds RIe, cannot trace into the building RThis would mean that no proprietary remedy would be available for the worst 1ind of breachA it may even allow the breaching fiduciary to retain some benefit from their breach o 3eid' available as per normal E >robably not a bribe' already accepted the contract, payment came afterwards E 9o profit o >rofiting from his position as fiduciary o 4ame to him in that capacity o 4lear breach of no profit rule +b/ *reaches' appropriating the cafY%s profits E 4lear breach o 9o conflict, no profit rules +c/ 3emedies E A is able to obtain recovery of the profits and royalty payment to which A is entitled

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o If a remedy is available +applying 3eid/, A will be entitled to a prorated share in the bribe +H-000/ E !ecure by lien or charge E !he can trace into the actual building to secure such a remedy o 8nclear whether the building has increased in value E A may be entitled to a constructive trust over the building o *uilding was purchased entirely with the H&0 000 and the profits +d/ !cope of the @oint venture' does it encompass the *runswic1 #ro(its* E Is setting up the new business a breachF o :hat is the scope and ambit of the dutyF o Doesn%t include not carrying on any other food businesses E :ill the *runswic1 restaurant be in direct competition with the 4arlton cafYF o 3eal and sensible possibility of conflict o Different mar1ets R*ut both food businesses o Different suburbs R *ut neighbouring R 4f another city E Does it amount to a misuse of *%s position as fiduciaryF o 9ot an opportunity uni ue to the position o Bowever, did use the trust assets +e/ 3emedy E :arman' carrying on a business isn%t li1e other remedies o 4onstructive trust probably not possible o 2specially since it was successful largely due to *%s own s1ills E 2g, account of profits for a specific period of operations E To what e)tent is the *runswic1 restaurant a profit of o The building was completely derived from the breach o Bowever, *%s 1nowledge and goodwill is his own E !ide note 5 !ayKDee' o !hould the constructive trust be in favour of the @oint venture +ie, shared in proportion to their shares in the business/F o It was in !ay Dee o 2ven though some of the remedies were against *, the others may be held @ointly o !ee !ay Dee 4 4onclusion +a/ Andrea has e uitable claims to' E The profits misappropriated from the cafY business in her share by way of constructive trust

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E A half o share 2ven of if the no H&0000 mental payment element, by can way stillof trace constructive trust, o 2g, third party volunteers possibly traceable into the warehouse in *runswic1 E 2ffect The initial of tracing investment on personal money, remedy as accrued o the !ecure the personal claim E >ossibly, *runswic1 profits o !lightly more generous tracing rules 9ote different mental standards to be applied to each test for the various remedies. There is also some overlap between doctrines for the* defences +eg, *(>(C:9/. 9ote interaction between 3emedy 4hec1list tracing and !ay Dee, and 1nowledge and $notice%. & >ersonal remedies

:hat personal remedies does the principal have against the breaching fiduciaryF
+a/ 4ompensation +b/ Account of profits +c/ 3escission +d/ 2ffect of tracing on personal remedies

Tracing can be used to secure a personal remedy by e uitable charge or lien.

. >roprietary remedies

:hat proprietary remedies does the principal have against the breaching fiduciaryF
+a/ Tracing

To obtain a proprietary remedy, it must be possible to trace the property into their hands. This will not be possible if it has been dissipated.
+i/ 2lection to ta1e property +if fungible/ E Only if the property is worth more than the loss +ii/ +b/ 4onstructive trust +c/ 2tc 6 Third party remedies

(or each third party, as1'

+a/ Is there a personal remedyF E *arnes v Addy o (irst limb o !econd limb E 3e Diploc1 +personal claim/ +b/ Is there a proprietary remedyF E Is there tracing available against themF

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