Just Follow the Money: Tracing at common law and equity
“Tracing” allows a claimant to locate misappropriated assets in order to assert their property rights and seek an appropriate remedy by identifying the value of an asset into substitutes it has been exchanged for.
Tracing is not always necessary to pursue a claim. You can always pursue a personal remedy (e.g. for unjust enrichment or conversion of goods) against someone who has misappropriated your property. However, this faces the possible obstacle of the defendant being insolvent, which tracing can get around by allowing you to pursue a claim for your property (which is not part of the defendant’s estate) rather than against them personally.
Tracing can support common law claims, where a claimant has legal title in the relevant property (i.e. assets you own outright), and equitable claims, where a claimant has beneficial interest in the property (i.e. assets held by others for you under trust). Tracing operates under different rules at equity and common law. The difference is arguably arbitrary (and there is a case for reform), but at present it is important to understand the distinction to know what claim (if any) you can pursue.
Both common law and equity allow tracing through “clean substitutions”, where property retains an identifiable form. Where misappropriated assets are exchanged for other specific assets (e.g. if you have possession of my money and use it to buy yourself a car), there is “transmission of a claimant’s property rights from one asset to its traceable proceeds”.
Common law also allows tracing into a mixed substitute where a defendant has carried out the mixing (e.g. if you deposit my money in your bank account). However, claimants cannot trace a mixed substitute into the possession of another defendant (e.g. if you deposit my money into your bank account and then take money out of the account and give it to your wife). Common law also does not allow tracing where a prior recipient has carried out the mixing (e.g. you give my money to your wife, she deposits it in her bank account, and then she takes money out of the account and gives it to you).
Contrastingly, equity allows tracing through mixed substitutions to third-party recipients. This is clearly a more advantageous situation for a claimant to be in. Equitable tracing is, though, subject to the restriction that property “has been the subject of fiduciary obligations before it got into the wrong hands” because equitable rights arise out of fiduciary relationships (relationships of “trust and confidence”). Outside of trust contexts, examples of fiduciary relationships include solicitors (to their clients) and directors (to their company).
This restriction has led the courts to impute fiduciary relationships into a widening range of situations (e.g. bribery and undue influence) by extending the recognition of “constructive trusts”. There are still cases, though, where you may have a common law claim only, the main example being theft. Unlike fraud, it is very difficult to construe a thief as having breached a relationship of trust and confidence with their victim.
This discrepancy appears incongruous. Why should legal ownership be harder to assert than beneficial interests? Why should a legal owner be precluded from asserting their rights over assets, which, like misappropriated trust property, should not be considered to be the defendant’s property at all?
Whilst the fiduciary requirement is a natural restriction on purported equitable claims, it appears to be an arbitrary ground for distinguishing common law claims. Indeed, without the separation of legal and beneficial ownership involved in a trust scenario, the legal owner of an asset has the equivalent of beneficial interest.
Nevertheless, and in spite of some judicial sympathy to reform over the years, this remains the position in law even if it is ultimately a distinction of historical accident rather than principle.
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