Property Essay 2 - Tracing

Matteo Carraro (HTKN0)
Matteo Carraro
Candidate Number: HTKN0
Property Law II
SP4: Tracing & Restitutionary Proprietary Rights
(Prof R Stevens).
NEW CHALLENGES, OLD SOLUTIONS:

REFINING THE OUTFASHONED CONCEPT OF "TRACING"
TO SOLVE 21st CENTURY PROPRIETARY ISSUES.
Property Law II - SP4: Tracing & Restitutionary Proprietary Rights (Prof R Stevens).

i) INTRODUCTION
The heterogeneous concept of tracing proves that Common law not only reflects the
social values of society but it also dynamically adapts to the ever-changing forms of financial
activities1.
The jurisprudence in this field leaves no room for ambiguities: the liquidation of Barlow
Clowes, 1988, Coloroll in 1990, British &Commonwealth and Polly Peck, 1990, Bank of Credit &
Commerce International (BCCI), Maxwell, 1991, (none yet finalized) and many others, continued
to provide in the final decade of the past century, easy-pickings for the insolvency industry2. This
unprecedented rise in fraud cases meant new methods had to be devised to provide adequate
remedies. As Lord Millet notoriously put it, Courts are increasingly concerned with attempts by
victims of fraud to trace their money, not from fraudsters or their confederates, who have usually
disappeared, but those through hands it has passed3.
The ambitious task of this essay is to delineate a method to fulfil Lord Millets optimism
about judicial advancement: even though the problem was triggered from recent financial failures,
the solution is a long-standing one dating back to 1742 when, in Scott v Surman4, the traditional
tracing doctrine was developed and eventually established in Taylor v Plumer5 by Lord
Ellenborough holding that the property of a principal always belongs to him regardless of any
change which that property may have undergone in point of form.
Nonetheless today tracing is infamous for its anomalies6; defining the many applications of
tracing, why it should be considered such an advantageous development in the law of property and
indeed even its own definition, are three objectives shrouded in controversy due to the dichotomy
between tracing at common law and at equity a juxtaposition which this essay will focus on.
The following section represents an attempt to allocate tracing (intended as a process
designed to achieve a wide range of claims) in its legal context by framing its definition and
purposes. The focus will then shift on the characteristics peculiar to equitable tracing (developed to
sustain the common law shortcomings) and secondly towards dissipating defective assumptions
like the requirement of fiduciary duty.
Lord Goff of Chieveley. The Future of the Common Law. The Wilberforce Lecture 1997. International and
Comparative Law Quarterly. Vol. 46, Oct., 1997, p.759.
2
J.Cousins, A.Mitchell, P.Sikka, C.Cooper, P.Arnold, Insolvent Abuse: Regulating the Insolvency Industry,
Association for Accountancy & Business Affairs. 2000, ( http://visar.csutan.edu/aaba/INSOLVNTABUSE.pdf ).
3
Lord Millet, Tracing the Process of Fraud, (1991) 107 LQR 71.
4
(1742) Wills 400
5
[1815] 3 M&S 562
6
G McCormack, The Proceeds of Tracing Case Comment, Company Lawyer, 1998, 19(3), 80-82.

The essence of the dissertation is to argue that the concept of tracing, as accepted by
modern courts, can only hinder an eventual fulfillment of Lord Millets ideal expressed through the
above quote: as we analyze its applications, it will be come apparent how virtually every
restriction imposed upon the exercise of tracing is but a detrimental anomaly that could be resolved
by the fusion of tracing methods at common law and equity. Yet, the drive behind reform might
still be too feeble.
ii) CONFLICT BETWEEN COMMON LAW & EQUITY

A. Complications arising from such conflict.
To appreciate the role of tracing, one needs to refer back to the 2nd Century BC and Gaius
classification of rights: in his Institutes he makes a distinction between jus in personam and jus
in rem7, both of which today stem from common law. However this cannot be accepted as an
exhaustive list, as the object of ownership can be other rights and not just tangible property: a third
category of rights against other rights, given out by equity, has been established.
The obvious consequence of this is that for property law the distinction between common
law and equity ceases to be merely historical; the reason why this is of such great relevance for our
purposes can be illustrated by an example: if A owns Blackacre and declares B trustee of land,
Blackacre now has two owners, one at law (trustee) and one in equity (beneficiary of trust) - two
answers to the same question: who owns Blackacre?
This inconsistency represents the crux of the problem; it could be argued that the owner is
the person at law, since common law is what gives rights in rem, while what the beneficiary has is
a right against my right to land. This implies that if a third party squats on Blackacre, then only B
(trustee) has a claim against the squatter as he has a right against the land exigible against the
whole world. The beneficiary has no claim against the trespassers, or rather: he has no standing to
sue in his own name for what is available for him is to compel the trustee to use his right on the
7
Gaius The Institutes of Gaius,(transl. OF Robinson, WM Gordon), Liber Quartus, I, Gerald Duckworth & Co Ltd,
1997 :et si quaeramus, quot genera actionum sint, uerius uidetur duo esse, in rem et in personam.

land to the beneficiarys benefit. That would however involve two as opposed to a single legal
action.
The above situation should be contrasted with the following: if B, trustee of Blackacre,
conveys his title to a third party, then this time A, beneficiary, does have a claim against the third
party because the latter is holding it on trust for the beneficiary: the trustee has a claim against the
right to the land if the trustee transfers it, it can be followed by the beneficiary.
When discussing bankruptcy, the same principles set in the above examples apply: the
beneficiary under trust which has gone bankrupt does not have a mere personal right against the
trustee had it been only a personal right the beneficiary would have had to line up with all the
other claimants but because has got a right against the trustees rights he can identify the assets he
has a right on and receive priority in respect of the other personal claimants.
An even more obvious example is provided when B holds a debt on trust: B is owed 1,000
from a bank, if B has an account which is in credit then all he has is claim as against the bank. B
(strictly speaking) has nothing (no particular asset or banknotes) but a claim that the bank owes
him that sum of money a right against another right.
If A agrees to covey to B a particular right (eg right to piece of land), what A has created is
a right B can exert against A in relation to a specific right (ie. a trust). Let us then, for the purposes
of concluding this broad presentation leading to the concept of tracing, briefly consider unjust
enrichment which also creates rights: if I mistakenly pay 1,000 to a third party, I have right for
him to make restitution. Is this right against him just a right for the value or against the very rights
I conveyed - in other words the same money or what now represents it? In Chase Manhattan8,
where money was transferred from one bank to the other by error, is the obligation of the recipient
bank to pay back the very fund it received? In that case the case would be dealing with a trust, as
the payor has a right against what, so to speak, is in the payee hands. What needs to be noticed at
this point is that it is first necessary to be able to identify the specific rights that are being claimed:
the beneficiary needs, in other words, to be able to trace. If it is not possible to identify it, he
merely has a personal claim as it was the case in Lipkin Gorman9, where the firm had only a
personal claim because could not identify the particular money received by playboy club, neither
the very banknote nor its traceable product.
8
9
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd, [1981] Ch. 105
Lipkin Gorman v Karpnale Ltd, [1987] 1 W.L.R. 987

In Clarke v Shee & Johnson10, Clarkes assistant, after taking money from his employers
customers, used them to buy lottery tickets from Shee & Johnson11. Lord Mansfield held Clarke
could recover his money through an action of money had and received:
Clarke does not sue as standing in the place of Wood his Clerk: for
the money Wood paid to the defendants are the identical notes and
money of the plaintiff. [Where money are paid mala fide] and if
their identity can be traced and ascertained , the party has a right to
recover () here the plaintiff sues for his identified property ().
[Emphasis added]
B. What is tracing?
Now that tracing has been collocated in its complex background of equity or common
law, personal and proprietary claims, we are now in a better position to define it as a concept. In
'Proprietary Remedies in Context Rotherham sustains the view that () tracing can only
properly be regarded as a remedial process that gives rise to new property rights 12. The examples
given above are however objective proof that by tracing is essentially meant the process of
following property through changes into form, enabling the claimant to point to that property as
the new location of his value and as subject matter for a personal or proprietary claim 13: a definite
authority is provided by the comments of Millet J in notable case such as Agip14, Foskett v
McKeown (at 128: tracing is the process of identifying a new asset as the substitute for the old.)15
and Boscawen16, where he said:
Equity lawyers habitually use the expressions the tracing claim
and the tracing remedy to describe the proprietary claim and
remedy available to the beneficial owner who seeks to recover his
property in specie. Tracing, however, is neither a claim nor a
remedy but a process. () by which the plaintiff traces what has
happened to his property, identifies the persons who received it, and
justifies his claim that the money which they handled or received
can be regarded as representing his property.
Millets view is supported by academic evidence, most notably Smith17 and Burrows
asserting tracing is rather the mean to achieve a specific remedy as opposed to the remedy
itself18.
10
(1774) 1 Cowp 197

Lotteries were then illegal hence the defendants gave no valid consideration for the assistants money.
12
Craig Rotherham, Proprietary Remedies in Context, Oxford Portland Oregon, 2002, p. 89
13
S Evans, Rethinking Tracing & the Law of Restitution, Law Quarterly Review, 1999, 115(Jul), 469-505
14
Agip (Africa) ltd v Jackson (1990) Ch 265
15
Foskett v McKeown and Others [2001] 1 AC 102.
16
Boscawen v. Bajwa [1995] 4 All E.R. 769 (at 776).
17
L Smith, The Law of Tracing, Clarendon Press Oxford, 1997, Ch.3 passim.
18
A Burrows, The Law of Restitution, OUP, 2005, p.78.
11

Being a transitive verb, it would be irrational not to ask what is that we trace, to trace at
what? The stand taken, however controversial, is that we trace in value, the exercise of tracing
being in fact neutral as to rights19. The mere fact that one can show a specific asset traceably
represents what was legally his, does not create any claim to that asset: hence tracing (ie technique
of identifying value) does not reveal anything about the rights which were exercised or which type
of claim is brought forward. Prof Smith convincingly explains this using a simple syllogism:
accepting that the essence of tracing is asserting that a new asset was acquired with the use of
another (as illustrated above), it is then clear that what links the claimant to the new asset is that it
was acquired with the old one: the claimant acquired the value inherent in the new asset with the
value inherent in the old asset. That is why we say we trace value: it is the only constant which
exists before, through and after the substitution20. This explanation was endorsed by Lord Millet
in his judgement in Foskett21, using the same wording as Smith22.
Rotherham indicates two significant inconsistencies in Smiths universally accepted view.
Assuming the object of the verb to trace is value, then the ratio of claims for substitute
assets whose value has increased could not be explained23: in Jones & Sons (Firm) v Jones24 a
partner in a bankrupt firm, drew 11,700 from the partnership account and paid them to his wife
who invested them profiting 50,760 (paid into a deposit account). Millet LJ held the trustee in
bankruptcy could trace from the 11,700 to the new (larger) sum it could be easily argued that
this directly contradicts Smiths principles.
Secondly, Smiths demonstration does not explain what Birks refers to as the geometric
multiplication of rights25: if claimants are allowed to choose between several assets to trace at,
how can the exercise locate the value can it be inherent in more places at the same time?
Both questions can be answered by clarifying that value in Smiths theory is probably not
referring to strictly economical-monetary value: the argument is simple and based on the
justification granted by tracing rules26, applicable in what Rotherham names metaphysical
19
P Birks, On Taking Seriously the Difference Between Tracing and Claiming (1997) 11, Trust Law International 2.
Smith, op. cit., p.119
21
[2001] AC 102
22
[2001] AC 102, at 128: we also speak of tracing one asset into another but this too is inaccurate. The original
asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset
because acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset but the
value inherent in it.
23
Rotherham, op. cit., p.104.
24
[1997] Ch. 159
25
P Birks, An Introduction to the Law of Restitution, OUP, 1989, p. 394.
26
This is in fact going to be explained in further details when discussing the mechanics of tracing in mixtures (both
physical and abstract, eg. mixed bank accounts) on page 10.
20

situations, as alternatives to the short ranged remedies available at law 27. As Lord Greene M.R. put
it in Re Diplock28, equity adopted a more metaphysical approach than common law: it had no
difficulty in treating a composite fund as an amalgam consisting of the mixture of more funds.
Each of these funds could be regarded as having, for certain purposes, a continued separate
existence29.
Hence Rotherhams presumed discrepancies in the orthodox view are set aside by adopting
equitable tracing rules which vest on the claimant the right trace in mixed funds, or indeed when
the mere economic value of the asset has increased or even decreased. As we shall argue in the
following sections, courts in numerous modern cases have granted such rights - from Foskett30 to
Re Hallett31 and Agip32.
C. Applications of tracing.
If one were to consider the milestone cases in this area, they all involve the exercise of
tracing but the sort of claims asserted are not the same. Lipkin Gorman33, for instance, involved a
claim at common law brought by a firm for money received by the club when one of the solicitors,
Mr Cass, withdrew funds from a client account and spent the proceeds on gambling. This is a
claim for money had and received, not a proprietary but personal claim (recipient is personally
liable for money received): the claimant has to go through a tracing exercise, show how the money
received by the club had been taken out from the bank account in question.
On the other hand, as already mentioned, the mere factor that I can indisputably prove that
the money now in possession of the club traceably represent the money withdrawn from Cass, is
not sufficient. The claimant needs more than a causal link; once again this can be illustrated
through a simple example: I mistakenly give John 1,000 paying them in his bank account; he then
decides to make donation to Oxfam from his own money, the ones he already had in a different
bank. John would not have given the money to Oxfam but for receiving money from me. In this
situation it is possible to show Oxfam would not have received that money if I had not done the
initial mistake: there is a but for connection between me and money given to Oxfam but we
27
Or what McMeel refers to as the measures yielded by tracing. G Mc Meel, The Modern Law of Restitution,
Blackstone Press, 2000, p.403
28
In Re Diplock [1948] Ch 465
29
G McCormack , The eye of equity: identification principles and equitable tracing, Journal of Business Law, 1996,
May, at 230.
30
[1998] Ch 265
31
In Re Halletts Estate, (1880) 13 Ch D 696
32
(1990) Ch 265
33
Lipkin Gorman v Karpnale Ltd, [1989] 1 WLR 1340

cannot say the money given to Oxfam traceably represents the money I gave to John because
money I gave him is still in the first bank. John has not exchanged it for anything else.
In this example a causal but not traceable connection is drawn: no transactional link can be
proved to show the money received substitutes the claimants property. As Burrows explains, this
avoids difficult factual causation enquiries and avoids stretching the ambit of unjust enrichment
liability too far34. Tracing cannot be based on factual causation: in Lipkin Gorman what the
House of Lords seemed, in fact, to be looking for was a traceable link35 to show the money
received by the club traceably represents money taken from account not a But for connection.
Their Lordships approach in the mentioned case, introduces the first of the anomalous
and artificial restrictions imposed by the courts36, in other words the tendency to view
transactional links as fundamental for the tracing process37. Prof Hayton writes how only such
proprietary links [as under transactional approach] will justify the proprietary remedy affording the
plaintiff priority over the defendant's unsecured creditors38; this view has however been
dismissed.
To establish a proprietary claim, the plaintiff must prove that the enrichment (derived from
what was originally his asset) has survived in the defendants hands 39 - but the absence of a
transactional connection does not indicate the absence of such enrichment. When considering the
importance attributed to deprivation of the claimant and the enrichment of the defendant40, it is
hard to understand why the absence of transactional links should override a proprietary claim in
the cases of surviving enrichment as shown above in Lipkin Gorman.
As a conclusion to the critique against the relevance of proof of transactional links in the
exercise of tracing, Evans provides a linear and logical argument: returning to the Oxfam example
above, if my mistake would have been sufficient to establish a proprietary claim against John
(who received my money), then (as Hayton concedes) tracing rules demonstrate that Oxfam
received an enrichment supporting a restitutionary claim: the prejudice to Oxfams other creditors
in allowing me (who mistakenly paid 1,000) to make a proprietary claim is the same as the
prejudice to [John]'s general creditors would have been if the claim had been made against [John]
(assuming that [John] had not passed the enrichment to [Oxfam]). So, if the prejudice to [John]'s
34
Burrows, op. cit., p.80.

Lord Goff of Chieveley's speech in Lipkin Gorman v. Karpnale Ltd [1991] 2 A.C. 548 at pp. 573G-574B suggests
that proprietary transactional links are necessary even if the claim is personal.
36
S Evans, op. cit. 473
37
Ibid.
38
Hayton, Equity's Identification Rules in Laundering and Tracing, Clarendon Press Oxford, (ed. Birks, 1995),
Ch.1.
39
G Panagopoulos, Restitution in Private International Law, Hart Publishing, 2000, p. 13.
40
P Birks, Introduction to the Law of Restitution, op. cit., p. 378-380.
35

creditors would have been acceptable, why should a proprietary remedy be regarded as
unacceptably prejudicing [Oxfam]'s creditors?41 Why should there not be a proprietary remedy
available against Oxfam?
Another personal claim based on the exercise of tracing is knowing receipt, developed at
equity as a counterpart to common laws money had and received42. The milestone case on this
topic, El Ajou v Dollar Land Holdings43, also provides a clear illustration of the fundamental role
of tracing when bringing a claim for knowing receipt44: the plaintiff's claim was to recover money
from the defendant on the basis of its knowing receipt of assets (part of the proceeds of a massive
share fraud), traceable in equity as representing misappropriated funds. Furthermore, both the
arguments of the defence and the prosecution pivoted around the application of tracing techniques
to identify the exact quantum: on the one hand the Claytons approach and on the other the one
used in Barlow Clowes45.
Even by just referring to the facts of El Ajou case, chosen as an example of the knowing
receipt claim, it is possible to understand how such a claim can be successful only after the tracing
exercise has been completed46. A frauded beneficiary of a trust can therefore rely on two different
claims, one at law and one at equity (money had and received, knowing receipt) both of which rely
on a tracing exercise to be applied.
A further example demonstrating how tracing is applicable to a wide range of actions is

provided by AG for Hong Kong v Reid47 where the defendant, Director of Public Prosecutions,
accepted bribes from local crime and was consequently imprisoned. The initial cause of action here
is breach of fiduciary, in relation to the principal's (Attorney General) remedies against an agent
accepting bribes; tracing was applied at two stages.
It was first necessary to identify the substitute value of the bribe in question. Reid was
alleged to have assets to the value of HK$12.4 million representing acquisitions financed by the
bribes: the defendant had purchased three properties in New Zeland - two jointly registered in his
and his wife's name and one in the name of his solicitor but as he effectively controlled them and
41
S Evans, op. cit., at 473

McMeel, op. cit. , p.384.
43
(1995) 69 P.&C.R. D25
44
John G Goldsworth, Tracing After Massive Share Fraud, T. & T. 1996, 2(1), 29-30.
45
[1992] 4 All ER 22.
46
McMeel, op. cit., p.386.
47
[1994] 1 AC 324.
42

because neither the wife nor solicitor were bona fide purchasers of value of the legal estate the
equitable tracing claim on behalf of the plaintiff could not be overridden.
Having identified the substitute value, the question for the Privy Council was whether the
subject matter of these bribes held on trust for his principal, the beneficiary of the fiduciary duty.
Lord Templeman held that (in a judgement refusing Lindley LJs in Lister v Stubbs48), at 322:
The false fiduciary who received the bribe in breach of duty
must account to the person to whom that duty was owed. As
soon as the respondent received a bribe in breach of the duties
he owed, he became a debtor in equity to the Crown for the
amount of that bribe () When a bribe is accepted by a
fiduciary in breach of his duty then he holds that bribe in trust
for the person to whom the duty was owed.
Whether is correct or not depends on what is considered the obligation of the fiduciary to
be: does he have obligation to hand over the very money he received (ie a trust)? On the other hand
if Reid is accountable merely for the value he received, it inevitable follows that the judgement is
based on an erroneous assumption.
Not only were equitable tracing rules accepted as applicable to the facts despite of the
judgements in the inferior courts, furthermore, as the properties had increased in value since
purchase, the beneficiary was able to trace in this additional value too49.
48
49
(1890) 45 Ch D1.
Howard Johnson, Dealing with Bribes, International Banking & Finance Law, 1994, 12(9), 94-96.
10

iii) TRACING INTO MIXTURES
Having given a brief overview of the variety of different scenarios in which tracing can
play a primary role, a number of significant concealed misconceptions50. The unnecessary Lipkin
Gorman requirement of establishing transactional links, has already been dealt with in the
preceding section, but all the other examples and scenarios provided so far, are illustrations of
clean substitution: Smith, in The Law of Tracing, distinguishes between clean and mixed
substitutions, the former being defined as all the value which went into the substitution was the
value being traced whereas the latter is the value being traced contributed only part of the value
used to acquire an asset51.
The importance of this distinction has its roots in the already mentioned judgment by Lord
Ellenborough in Taylor v Plumer52:
The property of a principal entrusted by him to his factor
belongs to the principal, notwithstanding any change hich that
property may have undergone in point of form, so long as such
property is capable of being identified and distinguished from all
other property () the right only ceases when the means of
ascertainment fail, which is the case when the subject is turned
into money and mixed in a general mass of the same
description53.
The modern interpretation of this passage was delineated by Scrutton LJ in Banque Belge
pour LEtranger54: where claimants money is deposited into a bank account which then reflects
credit from other sources, the common law cannot trace beyond the deposit 55. Smith dismissed the
whole approach with three words: This is incorrect. He points out how the decision in Taylor
was clearly based on the defendants assertion of property rights in equity: the court was hence not
concerned in distinguishing equitable from common law tracing56.
According to Lord Ellenborough, the difficulty which arises in such a case is a difficulty
of fact not of law, and the dictum that money has no earmark must be understood in the same
way; there are however valid ways to get around this difficulty by endorsing those rules
traditionally available at common law applying to physical mixtures, and transfer them to bank
accounts and money. If on the one hand it has been argued that these rules provide no final
answer to the question whether a restitutionary claimant should succeed [and are] no substitute for
50
A Tettenborn, Law of Restitution in England and Ireland, Cavendish, 2001, p.238.

Smith, op. cit., p.133 & p.160
52
(1815) 3 M&S 562
53
(1815) 3 M&S 562, 575.
54
Banque Belge pour LEtranger v Hambrouck, [1921] 1 KB 321
55
[1921] 1 KB 321, 328.
56
Smith, op. cit. , p.168.
51
11

establishing appropriate grounds for restitution57, nonetheless this is a consideration that only the
courts will be able to reach when considering the development of case law on this subject and
deliberating on the rules exposed below.
The three equity rules, as it is going to be illustrated, are rooted in common law methods
and can be summarized in the next paragraphs.
The first is called (perhaps inaccurately) pari passu or ratable contribution rule - utilized
when the resulting mixture is more (when invested to make a profit) or less (if squandered)
valuable than the original asset. As an example we can use oil or grain mixtures: if a crook steals
100 gallons of oil from A, 200 from B and pours them together, in strict theory one could separate
As from Bs molecules and give them to the original owner. Naturally we are not able to separate
molecules and therefore need rules to determine who owns the mixture: in common law this
situation is resolved with ownership according to ratable contribution of the parties so, of the 300
gallons remaining, A has ownership in relation to a 1/3, B 2/3. This is important if the mixture is
lost - if 150 gallons are burned, B is still entitled to 2/3 of the remaining gallons and A to 1/3.
The pari passu rule is related to the lowest intermediate balance rule: a thief takes 100
gallons of oil from A and another 100 B and pours both in single vat before burning 150 (leaving
only 10 gallons); he then steals another 100 gallons from C and pours that into the vat. At this
point it would be blatantly disadvantageous to C if the remedy were to divide the 110 gallons by 3
as A and B only actually contributed to 10 gallons of the resulting mixture. So when Cs oil is
poured in, they cannot claim a figure greater than the highest figure determined by the lowest
intermediate balance; so C can asset that of those 110 gallons, 100 must be his (10/11) whereas A
n B are entitled only to 1/22 each.
The last, and more applied, rule is the one set out by Sir W Grant MR in Claytons Case58
(at 608): There is no room for any other appropriation than that which arises from the order in
which the receipts take place and are carried into the account. Presumably, it is the sum first paid
in, that is first drawn out. It is the first item on the debit side of the account, that is discharged by
the first item on the credit side.
57
58
McMeel, op. cit., p.369.

Claytons case, Devaynes v Noble (1817) 1 Mer 572.
12

However appealing the rule might appear, it has often been criticized as unjust: in fact, in
the already mentioned Barlow Clowes59 case, Woolf LJ held the rule could produce arbitrary
results: it might enable a small group of investors to take particular assets just because they
happened to invest on one day of the week rather than another60 as had happened in this case. It
was therefore held that the use of the rule is a matter of convenience and if in particular
circumstances it would be impracticable or result in injustice it will not be applied61.
In Re Halletts Estate62 Claytons rule was substantially modified. Jessel MR held that the
trustee is assumed to utilize his own money first, regardless of the order in which money was paid
into the account: the rule prevents the trustee to say against the person entitled to the property that
the trustee has done [the] act wrongfully63. As Moffat puts it, the wrongful act is not allowed to
be used as a shield64.
A potential disadvantage of the Re Hallett rule is easily ascertainable with this example: a
trustee pays 1,000 of his own money in a bank account, followed by 3,000 of trust money and
then 1,000 of his own money. He then acquires for himself shares worth 2,000 before using
another 2,000 to buy a holiday. Accepting that the holiday was sold in bona fide, the money spent
on the holiday cannot be traced; it follows that a literal application of the first-in, first-out rule
would disadvantage the beneficiary: the court would in fact assume the trustee bought the shares
with his own money hence leaving the beneficiary with to assert that there is actually no
difference.
Burrows here refers to the Court of Appeal counterproductive judgment in Agip, amongst
many other modern cases following the orthodox view. Despite obiter dicta in Foskett65, one still
awaits an authoritative decision that overturns the traditional approach and fuses common law and
equitable tracing rules. For the moment the traditional view that one cannot trace at common law
through a mixed fund continues, unfortunately, to be the law66. a claim only against the
outstanding 1,000. To resolve this grievance, an subordinated principle67 was construed in Re
Oatway68 - and asserted in the already mentioned case El Ajou69: a claimant is entitled to assert a
charge securing the full amount of his claim over each asset deriving from a mixture of his funds.
59
Barlow Clowes Intl ltd v Vaughan , [1992] 4 All ER 22

61
[1992] 4 All ER 22
62
(1880) 13 Ch D 696
63
Ibid, at 727.
64
G Moffat, Trusts Law- Textx & Materials, Cambridge University Press, 4th Ed, p.697.
65
Lord Millett in [2001] 1 AC 102, 113, 128, 129.
66
67
Moffat, op.cit., p.697
68
[1903] 2 Ch 356
69
(1995) 69 P.&C.R. D25
60
13

In El Ajou especially, () no longer is the claimant's entitlement identified as that which would
have existed had the defendant been authorized to perform the transaction in question. It is
identified as a floating interest that settles on the assets ultimately found in the defendant's
hands70.
Hence, going back to the example above, the beneficiary would have a charge against the
shares bought by the trustee with the first 2,000 as well as the claim against the 1,000 left in the
account.
The orthodox view claims that common law cannot trace in a mixture. With the rules and
examples illustrated above, it has been proved that this is clearly not the case: it is enough to give
the example of physical mixtures like oil or grain to show that common law provides specific
methods to decide who gets what. This can only reinforce the thesis that the only real and practical
difference between these parallel systems is one does not give rights against other rights.
Hence there is a difference between the common law and equity, but this is not between
tracing rules as it has been shown that in practice they are the same both at common law and in
equity.
70
S Evans, op. cit., at 483
14
iv) NEED OF FIDUCIARY RELATION

As Fox LJ asserted in Agip71: It is a prerequisite to the operation of the remedy in equity
that there must be a fiduciary relationship which calls the equitable jurisdiction into being 72. As
Smith explains this is nonetheless an absurd requirement. If a trustee sells trust land and puts the
proceeds in his account, then courts will allow to trace and assert property rights in his bank
account; but if a thief steals from me and puts the money in his bank account into which he has
earlier deposited some money of his own the exercise would seem even simpler. But the thief does
not owe a fiduciary obligation to me. If it is true that a fiduciary relationship is a prerequisite to
tracing at equity, then courts are unable to trace into the back account in the second situation73.
It would be nonetheless farfetched if an English court followed such reasoning: as Sir P

Millet suggested, an equitable tracing remedy would be granted where the legal remedies are not
acceptable, thus stretching the concept of fiduciary relationship to breaking point74.
In Agip, Millet J held the claimant was able to trace in equity the value of money of which
it had been defrauded75 - it was sufficient that his accountant (deemed an auxiliary in the fraud
even though he received none of the proceeds) owed fiduciary obligations to the claimant. As
Smith comments, the artificiality of this reasoning is manifest and manifestly unnecessary 76. So
along as a fiduciary relationship has to be established to allow the claimant to trace in equity,
inevitably there will be incrisignly ficticious attempts to allocate fidicury relationships in fact
which do not support them77.
This was clearly the case in Chase Manhattan Bank78 where Goulding J held that the
payment of money into the wrong hands may give rise to a fiduciary relationship in respect of the
return of the same. Both academics and the judiciary are nonetheless gradually coming to a
definite dismissal of this supposed prerequisite as a misunderstanding: the requirement is always
said to be established in Re Diplock79 but the speeches do not specify fiduciary relationships as a
source of equitable property interests80. In Westdeutsche81 Lord Browne-Wilkinson accepted that
71
[1992] 4 All ER 451

Ibid. at 567
73
74
Sir P Millet, Tracing the Proceeds of Fraud, (1991) 107 LQR 71, at 76.
75
[]1990] Ch 265, at 280.
76
77
Ibid.
78
Chase Manhattan Bank NA v Israel British Bank (London) Ltd [1981] Ch. 105
79
[1948] Ch 465
80
C Mitchell & P Mitchell, Landmark cases in the Law of Restitution, Hart Publishing, 2006, p.242.
81
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] A.C. 669
72
15

the owner of a stolen bag of coins put in a bank account could trace the actual coins in their
exchange product regardless the impossibility to establish a fiduciary relation between him and the
thief82.
Let us consider the simple case of a purchase money resulting trust arising when A
purchases property and the name of another person is on the title: accepting A did not give B the
money as a gift, the latter will hold it on a constructive trust for the original owner 83. However the
trust could not be established without showing that As money was exchanged for assets acquired
in the name of B (ie. a tracing exercise). It is true then that in every case where a purchase money
resulting trust has been established, there has been an exercise of tracing at equity. And no one
would suggest that a pre-existing fiduciary relationship must be established in order to show the
creation of a purchase money resulting trust84.
Despite the judicial practice supporting otherwise, the fiduciary requirement is, as Smith
insists, nothing but a misunderstanding an unproductive restriction on the scope of tracing in
equity.
82
Ibid. at 716.
AJ Oakley, Parker and Mellows The modern law of trusts, 6th ed. (Sweet & Maxwell, 1994) at 189-91.
84
Smith, op. cit., p.129.
83
16
v) CONCLUSION: FUSION OF LAW & EQUITY?

As anticipated in the introduction, at this point it is possible to attempt an assessment of
tracing at common law and equity. It has been set out in the first section how ineffective common
law remedies are in cases of rights against other rights - starting from the basic dilemma of the
two owners of Blackacre, we have seen how relevant this becomes in relation modern
bankruptcy: the burden of proving transactional links discussed in Lipkin Gorman is a good
example of common law inefficiency.
Such shortcomings are counterbalanced by methods developed at equity: whereas the
common law may have stopped at the banker's door, equity was able to open the latch, walk in
and inspect the books85. Section ii) was dedicated to illustrating some of the main uses peculiar to
equitable tracing, knowing receipt for instance, and its application in modern cases like El Ajou
and Reid.
It is however is section iii) that the dualism between the two parallel systems becomes
impossible to defend: as has been observed, the equitable rules for tracing into mixtures are rooted
on principles developed at common law. In practice, as stressed by academics like Smith and
Birks, there is no significant difference between equitable and common law tracing rules. This
definitively discards common believes treating approaches to mixtures as the difference between
the two systems.
As Burrows correctly points out, in modern cases courts inevitably deal with mixed funds,
with the sole consequence of degrading the role of common law tracing (with all the consequences
this entails)86. One of the few arguments against this proposition is the restriction imposed on
equity tracing by the requirement of establishing fiduciary duties which has nonetheless been
dispelled as a misunderstanding, a negligible heritage of past erroneous judgments87.
What stands between equity and common law is the possibility to rely on rights against
other rights when tracing at equity as opposed to merely jus in rem. Both academics and the courts
have felt the necessity to put aside such an artificial distinction in favor of a fused approach.
Virtually all the issues discussed so far stem from such an antithesis, from the very definition of
tracing to more practical issues like methods to approach mixtures.
85
[1921] 1 K.B. 321 at 335 per Atkin L.J.

Birks, An Introduction to the Law of Restitution, ch XI - passim
87
Smith, op. cit., p.127-129 - passim.
86
17

In Agip, Millet J opined that rather than perpetuate the distinction it would be preferable to
develop a unified restitutionary remedy for the recovery of property transferred without
consideration to a recipient with no legitimate justification for receiving it88.
The academic word is divided as to the future of tracing: McMeel comments how recent
juristic exercise demonstrates that the obstacle to fusion is not as insuperable as has been
commonly supposed89. On the other hand, weighting these considerations with Burrows more
pessimistic view of such juristic development (and based on what has been discussed so far), it is
hard not to agree with Burrows: for, regardless of the irrationality dictating such distinction
between equity and law, too much water has passed under the bridge since 90 Lord
Ellenboroughs controversial judgment in Taylor v Plumer for courts and lawyers to contradict it.
Judges (principally led by Lord Millet) willing to move forward towards reform have
placed considerable emphasis on this issue in some of the obiter dicta mentioned in the previous
sections and which McMeel refers to in his optimistic premonitions (from Agip to Foskett and Re
Diplock); but despite all these efforts, Burrows concludes, one still awaits an authoritative
decision that overturns the traditional approach () for the moment the traditional view continues,
unfortunately, to be the law91.
WORD COUNT: 6,000 - Excluding Section Titles (30 words).
88
[1990] Ch 265, at 289.

G McMeel, op. cit., p.384.
90
Burrows, The Law of Restitution, p.84
91
Ibid.
89
18
Bibliography (listed in alphabetical order)
P Birks, An Introduction to the Law of Restitution, OUP, 1989.

P Birks, On Taking Seriously the Difference Between Tracing and Claiming (1997) 11,
Trust Law International 2.
A Burrows, The Law of Restitution, OUP, 2005.
J. Cousins, A.Mitchell, P.Sikka, C.Cooper, P.Arnold, Insolvent Abuse: Regulating the
Insolvency Industry, Association for Accountancy & Business Affairs, 2000,
(http://visar.csutan.edu/aaba/INSOLVNTABUSE.pdf).
S Evans, Rethinking Tracing & the Law of Restitution, Law Quarterly Review, 1999,
115(Jul), 469-505.
Gaius The Institutes of Gaius,(transl. OF Robinson, WM Gordon), Liber Quartus, I,
Gerald Duckworth & Co Ltd, 1997.
Lord Goff of Chieveley. The Future of the Common Law. The Wilberforce Lecture 1997.
International and Comparative Law Quarterly. Vol. 46, Oct., 1997, p.759.
JG Goldsworth, Tracing After Massive Share Fraud, T. & T. 1996, 2(1), 29-30.
H Johnson, Dealing with Bribes, International Banking & Finance Law, 1994, 12(9), 9496.
G McCormack , The eye of equity: identification principles and equitable tracing, Journal
of Business Law, May 1996.
G McCormack, The Proceeds of Tracing Case Comment, Company Lawyer, 1998,
19(3), 80-82.
Lord Millet, Tracing the Process of Fraud, (1991) 107 LQR 71.
Sir P Millet, Tracing the Proceeds of Fraud, (1991) 107 LQR 71.
C Mitchell & P Mitchell, Landmark cases in the Law of Restitution, Hart Publishing,
2006.
G Moffat, Trusts Law- Textx & Materials, Cambridge University Press, 4th Ed.
AJ Oakley, Parker and Mellows The modern law of trusts, 6th ed., Sweet & Maxwell,
1994.
C Rotherham, Proprietary Remedies in Context, Oxford Portland Oregon, 2002.
L Smith, The Law of Tracing, Clarendon Press Oxford, 1997.
A Tettenborn, Law of Restitution in England and Ireland, Cavendish, 2001.
19

Cases (Listed in chronological order)
Scott v Surman (1742) Wills 400.

Clarke v Shee & Johnson (1774) 1 Cowp 197.
Taylor v Plumer [1815] 3 M&S 562.
In Re Halletts Estate, (1880) 13 Ch D 696.
Lister v Stubbs (1890) 45 Ch D1.
Banque Belge pour LEtranger v Hambrouck, [1921] 1 KB 321.
In Re Diplock [1948] Ch 465.
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd, [1981] Ch. 105.
Lipkin Gorman v Karpnale Ltd, [1987] 1 W.L.R. 987.
Agip (Africa) ltd v Jackson (1990) Ch 265.
Barlow Clowes Intl ltd v Vaughan [1992] 4 All ER 22.
AG for Hong Kong v Reid [1994] 1 AC 324.
Boscawen v. Bajwa [1995] 4 All E.R. 769.
El Ajou v Dollar Land Holdings(1995) 69 P.&C.R. D25.
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] A.C.
669.
Jones & Sons (Firm) v Jones [1997] Ch. 159.
Foskett v McKeown and Others [2001] 1 AC 102.
20

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NEW CHALLENGES, OLD SOLUTIONS:

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ii) CONFLICT BETWEEN COMMON LAW & EQUITY

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(1774) 1 Cowp 197

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Burrows, op. cit., p.80.

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A further example demonstrating how tracing is applicable to a wide range of actions is

S Evans, op. cit., at 473

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A Tettenborn, Law of Restitution in England and Ireland, Cavendish, 2001, p.238.

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McMeel, op. cit., p.369.

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Barlow Clowes Intl ltd v Vaughan , [1992] 4 All ER 22

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S Evans, op. cit., at 483

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iv) NEED OF FIDUCIARY RELATION

It would be nonetheless farfetched if an English court followed such reasoning: as Sir P

[1992] 4 All ER 451

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v) CONCLUSION: FUSION OF LAW & EQUITY?

[1921] 1 K.B. 321 at 335 per Atkin L.J.

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WORD COUNT: 6,000 - Excluding Section Titles (30 words).

[1990] Ch 265, at 289.

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Bibliography (listed in alphabetical order)

P Birks, An Introduction to the Law of Restitution, OUP, 1989.

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Scott v Surman (1742) Wills 400.

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