EQUITY AND TRUSTS
REMEDIES FOR BREACH OF
TRUST:
TRACING
REMEDIES
Of two kinds:
• Personal
or
• Proprietary
Personal Remedies
Enforceable against the person – it is an
award of money
Proprietary remedy
Awarded against a specific asset
Liability
Liability for breach of trust is
compensatory – g aimed at
recompensing a beneficiary for their
loss.
Remedy is personal – trustee is
compensating beneficiary for loss from
the t’s own funds.
Tracing
Misappropriation or misdirection of
trusts assets then beneficiary may
choose to sue for breach or make a
proprietary claim to the asset.
To identify asset – “tracing” may be
used.
Profits
Unauthorised profits: fiduciary may need to
make “account” of profit and pay it over
OR CT may be imposed. Can be useful
where: fiduciary is insolvent or if profit is
property that increases in value
Tracing process can be used to identify
property as trust property
Remedies against third
parties
Personal remedy available against third
party where they have assisted in
breach of trust or knowingly received
trust property
Third Parties
Third parties in these circumstances are
accountable as constructive trustees –
secondary liability i.e. third parties liable
for breach of trustees – liability for
accessory breach of trust
Third parties
Liability against third party is personal only
Liability for dishonest assistance does not
depend on receipt of trust property – so
dishonest assistant is not a trustee.
See Millet LJ in Dubai Aluminium v Salaam
[2003] 1All ER should now discard words
“accountable as constructive trustee” and
substitute “accountable in equity.”
Dishonest assistance
• Assistance requires participation
• Dishonesty of third party is required but
not also on pat of trustee who is liable
regardless of state of mind
Dishonesty
Royal Brunei Airlines v Tan [1995] 3 All
ER 97
Lord Nicholls: acting dishonestly meant
simply not acting as honest person in
circumstances (objective standard)
But see also Twinsectra v Yardley
[2002] 2 All ER 377: three possible
standards for dishonesty.
Standards of dishonesty
1. Subjective standard – only dishonest if
breaches own standards of honesty
2. Objective: if breaches ordinary
standards of reasonable and honest
people
Third standard
Combines objective/subjective:
Objective test applies but person must also
realise they are dishonest by those standards
HL: this test should be adopted as standard
Knowing receipt
Leads to liability to account to trust for
value of property received
Reclaiming trust property
Any person receives trust property
takes it subject to trust – thus
beneficiaries can reclaim property
What if not trust property?
If recipient has not trust property or
traceable proceeds then only personal
remedies available –
But if trustee is insolvent then use –
then only possibility is to impose
personal liability on third party to
account for knowing receipt
Two related issues
Personal liability to account only arises
if it can be shown he received it with
knowledge of trust – if so then is
constructive trusteeship
Knowledge
• Liability as constructive trustee only
imposed if requisite degree of
knowledge.
• But – degree needed is far from certain
States of knowledge
See Baden and others v Sociéte Générale pour
Favoriser le Développement du Commerce et de
l’lndustrie en France [1992] 4 All ER 161
Gibson J: 5 states of knowledge
(i) actual knowledge; (ii) wilfully shutting one’s eyes
to the obvious; (iii) wilfully and recklessly failing to
make such inquiries as an honest and reasonable
man would make; (iv) knowledge of circumstances
which would indicate the facts to an honest and
reasonable man; (v) knowledge of circumstances
which would put an honest and reasonable man on
inquiry.
Knowledge
1-3 constitute actual knowledge
4-5 only constructive knowledge
But: does person who receives with
knowledge of types 1-5 be liable to account
as CT or is higher degree of knowledge
needed?
Knowledge
Some cases have founded liability on any of 1-5.
Thus negligence would give rise to personal
liability
But 4-5 now held insufficient Re Montagu [1992] 4
All ER 308 – Megarry: recipient only liable if want
of probity
actual and types 1-3 indicated a want of probity
but whether 4-5 would was dubious
knowledge
Subsequent cases have followed this
approach so seems clear that recipient
only liable as CT if he had knowledge of
types 1-3.
knowledge
Recent decision in BCCI v Akindele [2001]
Ch 437 introduced new test for recipient
liability
Norse LJ rejected Baden categories. If single
test for knowing assistance then same for
knowing receipt: unconscionable to retain
receipt. But not clear to what degree.
Recap
•
•
•
•
•
Trustee primarily liable for breaches
Liability is compensatory
Award is personal against trustee
Remedy is compensatory damages
Can also be account of profits
Other remedies?
What if trustee is insolvent when a personal
remedy would be of little use?
If third party involved in breach then
beneficiaries can pursue the stranger
Remedy is personal against third party – but
secondary
When property still held beneficiaries can
assert proprietary claim to the property. If not
and no proceeds then personal liability.
Personal remedy v
proprietary claims
Personal remedy is only of use if
defendant has means to pay
Beneficiaries may purse proprietary
remedies – used to identify trust
property or its proceeds (exchange
assets) if it is sold.
Proprietary claims
Is trust property misdirected or
misappropriated or a profit made then
proprietary claim available.
How do beneficiaries decide what to
do?
Proprietary action
Advantages: if defendant is bankrupt
then beneficiaries are just creditors. But
if trust property still held then proprietary
claim will allow priority over creditors.
Advantages
Advantages: beneficiary can regain the trust
property from third parties except the bona
fide purchaser for value.
Also – prop. Claim allows benefit of any
increase in value. But beneficiary can only
make claim if can identify the trust property.
This depends on tracing.
Tracing
Is the process or method used to identify trust
assets so that a remedy can be asserted –
e.g. an equitable charge or personal remedy.
At common law – the original owner may
claim legal asset or seek remedy like
damages for conversion or for money had
and received.
Tracing
For statement on nature of tracing see
Millett LJ in Foskett v McKeown [2000]
3 All ER 97
Following and tracing
Millett LJ also explains difference
between following and tracing.
Tracing
Can be done at common law or in
equity
But there is a major distinction between
these
Tracing
Common law rules allow for
identification of property or substitute
property common law is limited: no
tracing through mixed fund
Tracing at common law
Subject to criticism. Fiduciary concept
has been placed under strain as a
result.
Tracing in equity
Equitable tracing not defeated by
mixing, conversion substitution
Rules apply especially for mixed funds –
evidential presumptions
To use equitable tracing certain
requirements must be fulfilled …
Re Diplock
See Re Diplock [1948] Ch 465
Claimant may trace provided there was a fiduciary
relationship between the claimant and the
recipient of his money that gave rise to an
equitable proprietary relationship in the claimant.
So must be possible to find a fiduciary relationship
between the person claiming it and person who
initially held funds
Requirements
Fiduciary relationship: criticised as too
restrictive of right to trace – still applies
but see Foskett
Shalson v Russo
Shalson v Russo [2002]
Rymer J considered that Foskett did not
show there is no need to demonstrate a
fiduciary relationship
Need for fiduciary
relationship
Need for fiduciary relationship for
equitable tracing stands
Can present difficulties in some
situations
Other limitations on
equitable tracing
Right to trace is only available to
persons with equitable interest in the
property
Right to trace in equity is available to
beneficiaries under an express trust or
where circumstances are such that CT
or RT arises
Equitable interest
This requirement is also difficult.
Does a trust relationship exist under
void or voidable contract or when made
by mistake or when thief has
possession of property ?
Tracing – what can be
claimed?
Depends on nature of fund – mixed /
unmixed
or – if bank account if that is mixed
No mixing of trust property
If clean substitutions then beneficiary
can claim sale proceeds provided they
are identifiable
If proceeds used to purchase an asset –
can take property or have charge
Mixed funds
Equity uses rules to identify trust
property:
Affected by whose money is mixed and
how it is mixed
Mixed funds
Where mixed fund is between trustee
and beneficiary the beneficiary has first
charge over it or any property
purchased with it.
Mixed funds
Re Tilley [1967] 2 All ER 303 Ungoed-Thomas J:
beneficiary has right to claim proportion of mixed
fund – where asset bought wholly with
trustee/beneficiary money, beneficiary can treat
as trust property or as security for trust money –
right applies also where part trust money and
trustee money.
See Foskett for restatement of rule.
Mixed funds
Where mix is funds of two trusts or trust
and innocent volunteer then trusts share
funds rateably
If trustees own funds mixed as well then
rule is that beneficiaries claims are met
first
Bank accounts
If mix is in a bank account the special
rules apply
Bank accounts
Trustee assumed to spend own money first
see Re Hallet (1880) 13 Ch D 696 n.b. rule
that beneficiary has first charge o property
purchased from trust fund still applies
SO – beneficiary has choice – claim balance
or charge on property also now proportionate
share of asset
Bank accounts – lowest
intermediate balance rule
Claims are limited to balance at time of
paying in – not later additions unless
contributions to trust money
Overdrawn accounts
Cannot trace into overdrawn accounts.
Backwards tracing? E.g. Loan paid off with trust
money can beneficiaries trace asset bought
before trust money paid off loan ?
See Bishopsgate Investment Management Ltd v
Homan and others [1994]
3 WLR 1270. 30. and Shalson v Russo – in which
it was said backwards tracing is possible
Mixing of two trusts or
innocent volunteer
Clayton’s Case (1816) 8 LJ Ch 256
“First in first out” rule
Only applies where current running
account but rule can be disapplied
Barlow Clowes v Vaughan
[1992] 4 All ER 22
Company collapse – under Clayton’s Case
late investors would recover earlier investors
not.
CA held: first in first out not to be applied
where impractical or unjust or contrary to
express implied intention of investors
Money therefore shared rateably between all
investors
Re Hallett
Where trust money used then asset can be
claimed or charge for amount owed. Where
Increase in value then claiming asset would be
sensible
Where mixed fund then beneficiary cannot elect
to take the property but can have a charge for
amount owed. But – this means trustee benefits?
Re Tilley can claim share according to amount of
trust money used.
Example
Example: A mixed fund of £5000 trust fund
and £5000 trustee money. Shares bought for
£10,000.
The beneficiary has an election – can claim
proportionate share or enforce a charge. If
shares increase in value then better to claim
proportionate share, if they decrease then a
charge would be preferable.
Foskett v McKeown [2000] 3
All ER 97
Foskett – beneficiaries’ claim limited to
charge
Foskett v McKeown [2000] 3
All ER 97
HL: where trustee uses trust money as
part of purchase price of an asset
beneficiary can claim proportionate
share or to have alien on it to secure
personal claim.
Availability of charge
Charge is only available where fund
consists of trust and trustee property
and not where fund is made up of
innocents who must be treated and
share equally
Innocent volunteer
Trust property can be recovered from
innocent volunteers but if trust money is
mixed with him – then share is equal
with beneficiaries
When is tracing not
available?
Cannot trace against bona fide
purchaser for value without notice of
beneficiaries interest
But possible to trace proceeds of sale
When is tracing not
available?
If property is not identifiable: i.e. if
dissipated or used to pay debt
Personal action is alternative
Subrogation
Claimant in same position as secured
lender – same rights as against the
borrower as secured lender
See Boscawen and others v Bajwa
[1995] 4 All ER 769
When is tracing not
available?
If equitable remedy available would
result in injustice then cannot be applied
e.g. Re Diplock see above for defence
of change of position