Trust Law Enforcement Revision
Dubai Aluminium v Salaam 2002
A firm of solicitors, F, appealed against a decision that it had not been vicariously
liable for the dishonest acts of a partner, A, and was not entitled to contributions
from S towards settling a claim brought by D, a client of the firm. S had
dishonestly participated in a fraud against D and A had acted as S's solicitor in
drafting documents wrongfully assisting the fraud.
Agip (Africa) Ltd. v. Jackson [1990]
Liability to account for funds as a constructive trustee is established where the
defendant is an accountant who acts dishonestly in knowingly assisting in a
fraud by his client.
Lloyds London pays D. Later, C pays Lloyds NY. Still, allowed to see the first
payment as transfer of C’s money
Re Hallett’s Estate 1880
When a man does an act he has a right to, he cannot say that he in fact intended a
breach of trust. Hence, own money is always withdrawn from an account first.
Re Oatway 1903
When it is in the benefit of the trust, it will be held that the money taken out of
the account was in fact trust money.
Roscoe v Winder 1915
Lowest intermediate balance rule applied (and created)
Re Stenning 1895
First in first out rule (Clayton’s case) still good law in England inter se innocent
parties
Sinclair v Brougham 1914
Proportionate solution adopted in respect of claims of two innocent parties inter
se.
Re Diplock [1948] Ch 465
C sues charities to pay back money paid under a will, fails. Monies no longer
identifiable + it would be inequitable to demand repayment (‘he who demands
equity must do equity’). Obiter: Tracing remedy would be available whether
mixing was effected by innocent volunteer or fiduciary.
Barlow Clowes v Vaughn 1992
Court favoured the pari passi (equal standing) approach as opposed to the ‘rough
and ready’ solution of FIFO. FIFO did not have to be applied where it was wholly
inequitable to do so.
Lipkin Gorman 1991
Solicitor withdrew funds from clients account and gambled them away. Change
of position defense recognized (against proprietary claims).
Common law tracing
Recognized, provided the property
remains unmixed
Tracing in equity
Exists for both mixed and unmixed
funds. Claimant must establish
existence of a fiduciary relationship
Mixed property
Assets purchased by withdrawals form
mixed fund
Increase in asset value
Lowest Intermediate balance
Tracing as between bens of two trusts
Taylor v Plumer, Lipkin Gorman
Re Hallet
Re Oatway
Jones v Jones; Fosket v McKeown
Roscoe v Winder
Claytons Case 1816; Sinclair; Barlow
Clowes
Tracing cannot affect rights acquired Re Diplock
by boda fide purchaser of the legal
estate for value without notice
Tracing
is
extinguished
where Re Diplock
property cannot be identified e.g. funds
spent on holiday
Tracing not allowed where result Re Diplock?; Lipkin Gorman
would be inequitable, now called
change of position
Claimant must establish that the Re Diplock? Chase Manhattan v IBB;
property was held by a trustee or Westdeutsche v IBC
fiduciary, even though the mixing need
not be effected by fiduciary
Penner on Tracing
Series of debt analysis & Monolithic debt analysis
 Under both the bank is a purchaser of the money for value
 Beneficiary cherry picks which subsequent withdrawals were of trust money,
this is justified by principle that all reasonable inferences when faced with
factual difficulty will be made against wrongdoer (Armory v Delamirie
(1722)
 Lowest intermediate balance rule
o James Roscoe v Winder (1915); ben’s interest in account cannot be
greater than the lowest intermediate balance
 Bank account of innocent person: First in first out rule (rule in Clayton’s Case;
affirmed in Barlow Clowes, but held that it is not to be applied blindly to all
circumstances)
 Common law rule in case of mixing of fluids: proportionate shares

American rolling charge: proportionate shares between innocents, couple
with lowest intermediate balance against account a non bona fide account
holder
Backwards tracing
 Smith and Penner: we should be able to trace into a debt. In case of overdraft,
money should be traceable into whatever created the overdraft. General
position is to say that the tracing exercise ends because there are no
proceeds
 Agip: Lloyds London pays D. Later, C pays Lloyds NY. Still, allowed to see the
first payment as transfer of C’s money
 First instance judge in Bishopgate Investment v Homan 1995 supported
Backwards Tracing: When D intends to pay overdraft by misappropriation, or
when money is used to reduce overdraft to make more finance available, the
money can be traced into the asset he bought. Smith: tracing has nothing to
do with intention, and tracing should only be into the asset which incurred
the debt in the first place.
Proprietary claims to traceable proceeds: charges and equitable ownership
 If pursuing a personal claim against the trustee, cannot have a charge over
the property he bought using the money as security for the payment. By
falsifying the account, the beneficiary disowns any interest in the property
bought (Lord Millet in Foskett). Penner: the way to get a lien is to adopt the
transaction as a secured loan to the trustee guaranteed using the property he
buys with the loan. Ben can adopt or falsify the transaction but not both.
Multiple claims
 Exchange product theory: Ben can make a proprietary claim to the proceeds
because the proceeds immediately become his when they are received in
exchange for trust property. They are automatically captured by the trust just
like property under an authorized transaction.
o Endorsed by Lord Millet in Foskett.
 Power in Rem theory: Ben has a power to vest himself with the equittible
interests (either ownership share or a lien) he elects, a power he excercises
when he brings a claim against a recipient.
Liability of third parties
Barnes v Addy 1874
The trustee’s liability may be extended in equity to others if they are 1) either
making themselves trustees de son tort (of their own wrongdoing) or 2)
participating in any fraudulent conduct of the trustees to the injury of the ben.
Strangers are not to be made constructive trustees merely because they act as
agents of trustees in transactions within their legal powers unless they 1) receive
and become chargeable with some trust property or 2) assist with knowledge in
a dishonest or fraudulent design on part of the trustees
Summary: An intermeddler in a trust becomes a constructive trustee if he is:
1) A trustee de son tort (of his own wrongdoing)
2) Knowingly receiving or dealing with trust property for his own use
3) Dishonest assistance or accessory liability
Trustee de son tort
Boardman v Phipps
Knowing receipt
Claimant must prove:
1) A disposal of his trust assets in a breach of fiduciary duty
2) Receipt by D of assets which are traceable as his assets
3) Knowledge on part of D that the assets are traceable to a breach of F duty
(initial or subsequent)
Re Baden 1983
5 types of knowledge:
1) Actual knowledge
2) Willfully shutting eyes to obvious
3) Willfully and recklessly not making such inquires as an honest and reasonable
man would make
4) Knowledge of circumstances that would indicate the facts to an honest and
reasonable man
5) K of cir that would put an H and R man on inquiry
1-3  partly subjective
3-5  objective
Re Montagu’s Settlement 1987
Constructive trust should not be imposed unless the conscience of the recipient
is affected. This depends on knowledge not notice, so only in first three
categories of Re Baden
 Constructive trust and tracing must be kept separate. Tracing primarily
determines rights in property, whereas constructive trust also creates
personal obligations
BCCI
Single test for knowledge for knowing receipt: the recipient’s state of knowledge
must be such as to make it unconscionable for him to retain the benefit of the
receipt.
Dishonest Assistance or accessory liability
Strictly speaking, D ought not to be called constructive trustee, for liability is
personal and not in rem.
Paragon Finance v Thakerar 1999
Difference between use of the terms constructive trust and constructive trustee:
 Constructive trust: Arises by operation of law where the defendant has
assumed the duties of a trustee by a lawful transaction that was independent
of and preceded the breach of trust.
 Constructive trustee: Obligation arises as a direct consequence of the
unlawful transaction which is impeached by the plaintiff. The defendant is
implicated in a fraud, and hence accountable in equity. However, he never
assumes the position of a trustee.  Better to say liable in equity (or liable to
account in equity?)
Cases in written notes:
Royal Brunei
Twinsectra
Barlow Clowes
Abou-Rahman
Target Holdings: A trustee in breach was only liable to compensate for losses
caused by the breach and rules of compensation developed in relation to
traditional family trusts with a number of beneficiaries should not be applied to
commercial trusts. For traditional trusts: trustee in breach must restore or pay to
the trust the value of the lost property. Common law rules on remoteness and
causation do not apply.