Equity - supervision 6 (tracing and
proprietary claims and remedies)
1. What is original authority for the idea that, if the claimant mistakenly pays money to the
defendant, the defendant may hold the money on constructive trust for the claimant?
2. And which case provides a more up-to-date definition, holding that the trust arises only when the
recipient learns of the mistake? - ANSWER 1. Chase Manhattan v Israel-British Bank
2. Westdeutsche Landesbank Girozentrale v Islington LBC
1. What is the "swollen assets" theory? - ANSWER The suggestion that even if the claimant
cannot identify particular assets into which the original misapplied asset can be traced (e.g. if T
misappropriates trust money and pays it into her own empty bank account, and gambles it away so
that it's lost) it should be entitled to a charge over all the defendant's assets to secure the value of
their claim.
1. What is the original authority for the idea that a rescission of a contract brings about a
constructive trust?
2. Who (in a later case) described the relevant trust as resulting, and what was the name of the case?
3. Who (in an even later case) said that he preferred the view in Case 1 to that in Case 2; and what
was the name of the case? - ANSWER 1. Lonrho v Al Fayed (No 2)
2. El Ajou v Dollar Land Holdings
3. National Crime Agency v Robb
1. What's a recent decision containing a summary of one judge's view of the law on backwards
tracing (and who is the judge)?
2. What is an important distinction made by judge (as regards a situation which he thinks counts as
backwards tracing, compared to a situation which he thinks doesn't count as backwards tracing)? -
ANSWER 1. SFO v Hotel Portfolio II (the judge is Foxton J)
2. The judge says that where a trustee takes out a loan in his or her personal capacity in order to buy
a car, but then resolves to use trust funds to repay the loan, it does not seem apt to describe the
decision to take out the loan and to acquire the car as breaches of trust which the beneficiary is
electing to treat as acts done for their benefit. Only the repayment of the loan with trust funds
merits that characterisation.
The judge then says that the position may well be different when the trustee acquires property in the
car prior to payment, and then uses trust funds to pay the seller, because as a matter of substance,
there is a single transaction in which the trustee has used trust funds to buy a car.
1. Where T uses trust money to pay debt owed by a third party, which is secured on the third party's
property, in which case did the majority hold that subrogation could be available even where the
,Equity - supervision 6 (tracing and
proprietary claims and remedies)
claimant could not assert a pre-existing equitable interest in the money: it could be awarded to
reverse the defendant's unjust enrichment?
2. And in which subsequent case was this extension of the proprietary remedy from proprietary
claims to personal claims supported by the majority? - ANSWER 1. Menelaou v Bank of
Cyprus
2. Lowick Rose v Swynson
1. Which case is authority for the idea that you can trace into a "specification" situation (aka where
non-fungible assets are mixed/combined with other non-fungible assets to make a new product)
where the mixing is wrongful?
2. Which case suggested that Case 1 involved a constructive trust because the mixing had been
wrongful? - ANSWER 1. Jones v De Marchant
2. Foskett v McKeown (Lord Millett)
1. Which judges in which case suggest (obiter) that a unification of the tracing rules would be
desirable?
2. What possible argument are there for the unification of the tracing rules? - ANSWER 1.
Lord Millett and Lord Steyn in Foskett v McKeown
2.
The inability of the common law to cope with mixed funds is a really significant limitation on a
claimant's ability to trace at common law (particularly in light of modern banking practices - where
money is transferred electronically - and sophisticated money laundering schemes where money is
transferred through a myriad of accounts).
The other thing to say is that the fiduciary requirement for tracing in equity doesn't really make
sense if we regard tracing merely as an evidential process which we use to identify assets in respect
of which a claimant may possibly have a claim at common law or in equity.
2. Where was it suggested (albeit obiter, and unsupported by previous case law) that the swollen
assets theory possibly applies in English law?
3. Where was it later made clear that the swollen assets theory doesn't apply in English law? -
ANSWER 1. Space Investments v CIBC
2. Re Goldcorp Exchange; Serious Fraud Office v Lexi Holdings
A claimant may be able to establish a fixed trust over their family home in her favour on the basis of
an express or inferred common intention.
,Equity - supervision 6 (tracing and
proprietary claims and remedies)
1. What is authority for this?
2. What case extended this reasoning into a semi-commercial context? - ANSWER 1. Stack v
Dowden
2. Harrison v Kahrmann-Morgan
A firm of potato growers went bankrupt. One partner in the firm then paid £11,700 from the
partnership account to his wife's bank account.
The wife then paid the money by cheque to a firm of commodity brokers. The brokers invested the
money for her in the potato futures market, and they made large profits for the wife, which they
then paid to her.
The wife then paid £50,760 into a deposit account. The trustee in bankruptcy of the potato growers'
firm claimed all the money on the basis that he was entitled in law to the money in the partnership
account at the date of the bankruptcy.
CA allowed him to trace that money into the profits sitting in the wife's deposit account, on the basis
that there was a chain of clean substitutions from the £11,700 to the profits.
As Davies and Virgo point out, the trustee in bankruptcy was able to claim the profit, cos it derived
from the original money paid to the wife, and there - ANSWER Trustee for the Property of
FC Jones & Sons v Jones
An equitable proprietary claim may be possible in cases involving misapplication by a fiduciary in
breach of duty (that is, where the claimant is the legal owner of property, but a fiduciary was in
possession and control of the property and dealing with it for her).
1. What is authority for this?
2. What are some conceptual difficulties with this idea?
3. What is a possible explanation for the idea? - ANSWER 1. Re Hallett's Estate
2. There are some conceptual difficulties with this analysis. We know that an express trustee will
usually have legal title to the property which she holds on trust for the claimant. But as you may
remember from introductory lectures, an agent won't always be a trustee - and a bailee, for example,
never acquires legal title to the property. So even though a fiduciary relationship exists, B (our
claimant) may still have legal title to the property. But nevertheless, her ability to make an equitable
, Equity - supervision 6 (tracing and
proprietary claims and remedies)
proprietary claim is well-established. This seems a little inconsistent, cos if she has legal title to the
property, then there's been no separation of legal title and a beneficial interest - B has absolute
entitlement to the property. But nevertheless, she can make an equitable proprietary claim, even
though A does not have legal title.
3. Televantos suggests a historical explanation for this. He tells us that, for example, in cases of
agency, Equity would treat an agent as trustee for the purposes of a particular transaction, as he
didn't have free use of the property for his own benefit - and this was sufficient to support the
claimants' right to trace and make an equitable proprietary claim.
Assume again that Terry takes £1m worth of trust money and pays it into her personal account,
which already contains £1m of her own money, again taking the balance in the account to £2m.
Let's assume that, on Monday, she withdraws £1m, and buys some shares with that money. She
keeps those shares for herself.
Then, on Tuesday, she withdraws the other £1m, and gambles it all away.
Subsequently, Betty discovers the breach of trust.
In this example, Betty will wanna know whose money can be traced into the shares, as there's no
money left in Terry's account, and it's hard to say whose money went where.
Again, the law resolves the evidential uncertainty against Terry, but it does this in a different way,
using the rule in Re Oatway.
What happens if we apply the rule in Re Oatway? - ANSWER Where the balance of the
account has been dissipated, the trustee cannot maintain that his own money was used to purchase
the investment and it was the trust money that was dissipated.
In other words, yet again, the law presumes that Terry did the right thing. But here, doing the right
thing would have meant using the trust money to buy the shares, and to have dissipated and spent
her own money.
Davies and Virgo contains criticism of Lord Sumption's judgment in Angove's v Bailey. Explain the
criticism. - ANSWER Davies and Virgo suggest that a constructive trust should arise (and
that Lord Sumption's analysis is wrong), cos Lord Sumption's focus on whether the intention to
transfer has been vitiated confuses rules about intention to pass title at Law with the different
question as to whether the defendant's retention of the money was unconscionable in the light of
the defendant's knowledge of the circumstances of the transfer.
