Following, Tracing and Stranger to a Trust

This article introduces concepts from trust law of interest to the everyday person.

Following and tracing allows property involuntarily taken from the original owner by reason of theft, breach of trust or mistake, to be identified, located, and followed by a proprietary remedy. They are, however, distinct processes: per Lord Millett in Foskett v Mckeown.[1]

The rules behind tracing at common law and equity are fairly complicated and they require careful attention into the intricacies of their process before a claimant enters into legal proceedings for an equitable remedy.

Following

Following is “the process of following the same asset as it moves hand from hand”.[2] Simply put, it refers to ascertaining the physical location of the property which is unchanged. It identifies who the original owner of the property is, where the property is, so that it can be returned to the owner. For example, if a watch is stolen, the possession of the tangible item falls into the thief’s hand. The possession of the watch, a tangible item then can be transferred to different people and following is the process to physically locate the watch.

Tracing

Tracing, on the other hand, is to “[identify] a new asset as the substitute for the old” (emphasis added) on the basis that the new asset was “acquired in whole or in party with the original asset”.[3] The process can be legal or equitable, governed by distinct principles. Here, an important distinction must be drawn between clean substitution, i.e. where the value of property being traced is all the value that is substituted, and mixed substitution, i.e. the property is indistinguishably mixed with other property, as it bears on the availability of common law or equitable tracing.

(a) Tracing at Common Law

Tracing at common law allows the locating of identifiable misappropriated properties. It is essential that the involuntary transfer of the property in question does not involve transfer of the legal title. Therefore, while the Claimant might have equitable interest in the property, a lack of legal title will be fatal to a claim in common law.[4]

The common law remedy is restitutionary and personal, based on the principle of unjust enrichment on the party of the Defendant, who by using the owner’s property unjustly enriched himself at the former’s expense.

(b) Tracing in Equity

Equitable tracing is founded upon the Claimant’s beneficial interest in the property, so even irretrievably mixed properties can be identified as a “continuing equitable interest” in favour of the Claimant.[5] To enable tracing in equity, there must, apparently, be an equitable interest in the property concerned. Secondly, the Claimant must have benefited from a fiduciary relationship (e.g. one arising from trusts). Thirdly, where the transfer involves a breach of trust, the property transferred can be traced to any third party except a purchaser in good faith (i.e. without notice of the breach), even though there is no pre-existing fiduciary relationship[6].

The equitable claim for the property in question concerns the right in rem, i.e. proprietary interest. Thus, it is unaffected by the Defendant’s person insolvency.

(c) Loss of Right to Trace

Under Boscawen v Bajwa, the right to trace the property may be lost as against Equity’s Darling (i.e. Bona fide purchaser for value without notice)[7], and possibly when a change of position made it so unjust to trace and claim the defendant’s property.[8] Where the property has been dissipated, there can be no tracing.[9]

Liability of strangers to the trust

Whereas there is no fiduciary relationship, a stranger to the trust may still be personally liable for their conduct and will be liable to compensate the beneficiary for the trust property as a constructive trustee. They can be liable for (i) dishonest assistance and (ii) knowing receipt.[10]

(a) Dishonest Assistance

A person dishonestly assisting in the trustee’s breach of trust can be personally liable for the loss. The burden is on the Claimant to prove[11]: (i) a breach of trust by the trustee; (ii) assistance in that breach by the stranger and (iii) the Defendant’s dishonesty. Dishonesty is a more controversial element in the judicial arena. In Royal Brunei Airlines v Tan[12], it was held that dishonesty is an objective standard, i.e. what an honest person would do in the circumstances, in light of the knowledge, personal attributes and motives of the Defendant. However, the formulation was rejected in Twincectra Ltd v Yardley[13] in the House of Lords but re-affirmed in Barlow Clowes v Eurotrust.[14] The current position of the law is now unclear.

(b) Knowing Receipt

A person can be liable for knowingly received property given in breach of trust. The Claimant must prove (i) a disposal of property in breach of fiduciary duty; (ii) Defendant’s beneficial receipt of those traceable property as representing Claimant’s assets and (iii) Defendant’s knowledge that the asset he received are traceable to a breach of fiduciary duty.

Remedies

Tracing is not a claim nor a remedy but a process.[15] Having traced the property concerned, the court would order for an equitable remedy most appropriate and convenient in the circumstances. Remedies include (i) an equitable charge[16]; (ii) a resulting trust[17]; (iii) a constructive trust[18], (iv) an assignment back to the original owner[19] (v) subrogation[20]; or (vi) monetary compensation.[21]

Summary

By way of summary, the rules behind tracing at common law and equity are fairly complicated and they require careful attention into the intricacies of their process before a claimant enters into legal proceedings for an equitable remedy. In Hong Kong, the trust device remains a common application in different levels of law from family to commercial. This article serves as a brief introduction to concepts from trust law and hopefully it has given readers valuable information that would be applicable to them.

DISCLAIMER: this article is intended for informational purposes only and does not constitute legal advice.

References

[1] [2000] UKHL 29

[2] ibid

[3] ibid

[4] MCC Proceeds Inc v Lehman Brothers Intl (Europe) [1997] EWCA Civ 3068.

[5] Boscawen v Bajwa [1995] 4 All ER 769; Re Diplock [1948] Ch 465 CA at 520.

[6] Trustee of FC Jones and Son (a firm) v Jones [1996] EWCA Civ 1324

[7] Re Diplock [1948] Ch 465 CA

[8] Lipkin Gorman v Karpnale [1988] UKHL 12

[9] Bishopsgate Investment Management v Homan [1994] EWCA Civ 33

[10] Barnes v Addy [1874] LR 9 Ch App 244

[11] Grupo Torras SA v Al Sabah [2001] EWCA Civ 1370

[12] [1995] UKPC 4

[13] [2002] UKHL 12

[14] [2005] UKPC 37

[15] Boscawen v Bajwa [1995] 4 All ER 769

[16] Barlow Clowes Ltd v Eurotrust Ltd [2005] UKPC 37

[17] El Ajou v Dollar Land Holdings [1993] EWCA Civ 4

[18] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12

[19] Foskett v Mckeown [2000] UKHL 29

[20] Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66.

[21] Target Holdings v Redferns [1995] UKHL 10