Understanding tracing rules
The problem is identifying how much of the mixed property belongs to the claimant. In chapter 9 we identified classic relationships where a fiduciary relationship exists. requirements for equitable tracing, which may be more apparent than real. a fiduciary relationship was even necessary: Foskett v McKeown . Constructive trusts regularly arise in the context of real property. There are presumed fiduciary relationships although it is important to .. In Foskett v McKeown  1 AC at ;  UKHL 29;  3 All ER They also accepted that any substitute for the trust property, lawfully . a mixed fund with the repayment of trust moneys, not upon any actual exercise of that power. In Foskett v McKeown, Lord Millett adopted the analysis of Professor .. upon the relationship between unjust enrichment and property.
A against B and B against C. The reason why this might have been a better solution is the importance of transactional links between the parties to the litigation. From the perspective of C, he has never engaged in any transaction with A. He would expect that any claim against him would be brought by B. The facts in my example assume that A had a claim against B for repayment of the money paid by mistake.
But B might want to assert a defence of change of position. Would B have changed his position if C refused to repay his father? The answer would be much easier if all parties were joined into the action and before the court. If there were no law of tracing, the situation discussed above would require recognition that there are two actions involved in the chain of transactions. In the first, A would sue B.
In the second, B would sue C. The underlying reality that two claims are involved can be seen in the decision of the English Court of Appeal in Khan v Permayer. In fact, no money was owed to Mr Permayer. Strictly, there should have been two actions before the court. Another illustration can be used to show why claims against subsequent recipients actually involve multiple claims rather than a single claim. Then D uses the money to purchase a car from T who is a bona fide purchaser for value without notice.
- Constructive trust
- Constructive trusts and property interests
Neither at common law nor in equity is it possible to claim successfully against either T or T2. Because T was a bona fide purchaser, the claim against T is extinguished. The defence of bona fide purchase is designed to ensure the security of transactions generally.
Consequently, a claim must fail against the subsequent recipient, T2. However, there are many instances where there would be no purpose for the law to require all parties to be joined in an action against the ultimate recipient. The principles of tracing reflect this liberal approach.
The tracing principles allow a claim against an ultimate recipient where the claim against the intermediary is clear and any defences, such as change of position, are concerned only with the particular interests of the defendant rather than broader policy considerations such as the need for security of transactions seen in the bona fide purchase defence.
An early example predating Taylor v Plumer is the decision in Harrison v Pryse in By mistake, the legal title to the stock was transferred to a different person named Edward Harrison. The other Edward Harrison transferred the stock to a broker, Round.
Round sold the stock and paid the proceeds to the different Edward Harrison. He paid money for stock that he did not receive. The South Sea Company could have claimed either the value of the stock or the proceeds that Edward Harrison subsequently received. Lord Hardwicke recognised that the claim ought to have been brought by Governor Harrison against the company. The same liberal approach was taken more than two centuries later, after Harrison v Pryce had been long forgotten.
The money received subsequently passed through a long chain of transactions. The charge itself is entirely notional. The defendant against whom the charge was asserted pleaded that the claim consequent upon tracing could not be made because it would prejudice the rights of other potential third party claimants.
Robert Walker J held that: Further, any potential prejudice to third parties as a result of claims which arise as a result of the tracing process can be accommodated by placing the plaintiff on terms giving the example of a requirement for an indemnity.
Further still, the court must have a strong inclination to order that a defendant is charged with the receipt of proceeds which traceably derive from a fraud. The payment caused Relfo to become insolvent. Mr Gorecia was closely associated with the Varsani family. The circuit of payments was a dishonest design to divert funds to Mr Varsani to whom Mr Gorecia had caused trading losses.
The Court of Appeal rejected this argument. They could not have had any defence still less any defence that was not peculiar to their own interests. We have seen that tracing is concerned with a claim brought by a plaintiff against a defendant at the end of a chain of transactions where it would be a waste of time to join any party to an intermediate transaction to the proceedings.
In the fourth part of this presentation I will turn to how the rules of tracing give effect to that idea. But, for the moment I want to deal with the manner in which transactions must be linked in the law of tracing. Two options have been identified in the case law. Of the two, the second accords more closely with the recent existing cases and provides a principled basis for its future development. The second view requires that the transaction with the defendant by caused or anticipated by the defective transaction.
Professor Smith developed a distinction that had been drawn by Professor Peter Birks. The distinction was between i following, ii tracing and iii claiming. Hence, according to Smith, the tracing exercise must begin with something of value: However, there are difficulties with this analysis as a sufficient basis upon which a tracing claim can succeed. First, in none of these cases was causation between the relevant links argued as an issue in any detail.
In many cases in which the law of tracing is engaged, for example, there is no substitution of one right for another, through which transfer of value can be traced. Rather, there is simply a matched creation and destruction of value.
Tracing through bank accounts is a classic example. In these cases, there may be a series of transactions between a variety of bank accounts and involving a significant number of intermediaries. However, at each stage, there is no exchange or substitution of one right for another. Rather, each recipient has an increase in the value of the debt owed to him by a particular bank with a corresponding more or less decrease in the value of the debt owed to the payer by her particular bank.
What links the matched destruction and creation of value is a transaction. And it is only where there are a series of such transactions that are sufficiently linked that the law of tracing is engaged. At the end of the day, when all bank transactions were netted, these amounts would have affected a digital entry made by each of ANZ and Westpac. But nothing passed from one bank to the other and there was no substitution.
The tracing metaphor, and the idea of a substitution, invokes the idea of a movement or exchange of one thing for another. There is a transaction, and there is causation. This caused the European Bank to deposit an equivalent amount in its own name with Citibank. In the leading judgment, Spigelman CJ said at : The Benford account was always in credit, whether as a deposit account or as a current account. There was no occasion on which the value inherent in the account, which Benford held as trust property, had become located in the value inherent in the deposit with Citibank.
This leads us to the second analysis identified in the cases, namely that tracing rules are concerned with identifying when one transaction, actual or anticipated, has caused another. Neither is sufficient by itself. As for transactions, it is essential that a transaction occur before tracing can be possible. A simple example is a person who mistakenly leaves the heating on in his flat. This not only causes him a loss but it also has the consequence, which he did not desire, of free heating to his upstairs neighbour who would otherwise have had to pay for the same heat.
The upstairs neighbour can keep the benefit. The insurers claimed contribution from the owner for the saved docking expenses which the owner would otherwise have incurred. The House of Lords rejected the claim. These type of trusts are called '"institutional" constructive trusts'. They arise the moment the relevant conduct breach of duty, unjust enrichment etc.
They can be contrasted with '"remedial" constructive trusts', which arise on the date of judgment as a remedy awarded by the court to do justice in the particular case. An example is the Australian case Muschinski v Dodds.
They agreed to make improvements to the property by building a pottery shed for the woman to do arts and crafts work in. The woman paid for part of this. They then broke up. The High Court held that the man held the property on constructive trust for himself and the woman in the proportions in which they had contributed to the improvements to the land.
Understanding Tracing Rules
This trust did not arise the moment the woman commenced improvements - that conduct did not involve a breach of duty or an unjust enrichment etc. The trust arose at the date of judgment, to do justice in the case.
In Bathurst City Council v PWC Properties, the High Court that as constructive trusts are the most severe remedy in cases of breach of fiduciary duty, they should only be imposed when other remedies are inappropriate in providing relief. Usefulness of constructive trusts[ edit ].
A representative of the bank visited the home of the Amadios to sign the mortgage documents. The representative did however point out that the guarantee was not limited to six months, upon hearing the incorrect representation made by the Amadios son. The bank then demanded that the Amadios make pay the debt under their guarantee to pay the debts.
The Amadios were unable to meet the obligations of the guarantee and a notice was given that the power of sale under the mortgage would be exercised. The majority of the High Court of Australia held that the Amadios had suffered a special disadvantage, and so found that the conduct of the bank was unconscionable.
Mason J observed that unconscionable conduct refers to a situation in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage. This special disadvantage, in conjunction with the failure of the bank to disclose the facts necessary for the Amadios to make their own informed judgment about the transaction, was held to amount to unconscionable conduct.
Ultimately, the Court held that the Amadios would not have signed the documents had they been aware of the effect of the terms they were agreeing to.
Tracing | Digestible Notes
When considering an allegation of unconscionable conduct, the Court will focus on the bargaining power of the parties, in particular that of the stronger party, and their conduct.
The onus of proof will be upon the stronger party to show that the transaction was fair, just and reasonable. If the stronger party is unable to prove that the transaction was fair, just and reasonable, their conduct may be held to have been unconscionable and the transaction set aside.
If legal title to property has passed to the defendant pursuant to that transaction, the Court will usually hold that the defendant holds it on constructive trust for the plaintiff. THIRD PARTIES The rule in Barnes v Addy A third party who receives property knowing that the property was acquired in breach of a fiduciary duty or trust or has dishonestly participated in fraudulent design that involves a breach of trust or fiduciary duty, will be liable to account for that property.
The remedy is often in the form of a constructive trust. The sole remaining trustee, John Addy, appointed another trustee, against the advice of his solicitor. The Court of Chancery held that the solicitor was not liable for loss because no funds passed their hands and there was no fraudulent action by the solicitors. In Barnes v Addy, Lord Selborne LC referred to two limbs upon which third parties to a trust become constructive trustees. This occurs where the third party received property from a fiduciary knowing that it was acquired in breach of duty of the fiduciary.
This occurs when the third party knowingly assists a fiduciary to breach their duty. Both limbs in Barnes v Addy require the third party to have knowledge. In Nelson v Larholt  2 All ERa bookmaker was accepting cheques from a punter who was also an executor of an estate. The cheques used by the punter to pay his debts were printed with the name of the estate using estate to pay his debts.
The bookmaker was liable as constructive trustee for the estate because of what a reasonable person would know from the facts. The bookmaker should have known the cheques were not the punters personal cheques. The further category in Baden facts which would put an honest and reasonable person on enquiry should not be taken to be sufficient knowledge in Australia.
Knowing Receipt Under the first limb in Barnes v Addy, there must be knowledge that the property was acquired in breach of trust or a fiduciary duty. The third party received trust property or that subject to a fiduciary duty; The third party knew using one of the first four categories from Baden that it was trust property in breach of trust or fiduciary duty; The third party knew of the circumstances which made the transfer of the trust property in breach of trust or fiduciary duty.
The Bell Group was going into liquidation and the directors made an arrangement with Westpac Bank about the structure of loans owed by the group to the bank. The reorganisation of loans was unfavourable to the companies. The Bank knew that no director of the companies would have agreed to the restructure if they had been acting in the interests of shareholders. The directors of the Bell Group had a fiduciary duty to the company and shareholders in attempting the restructure and accepting the loans for the company.
The liquidators alleged that the directors were in breach of that fiduciary duty by undertaking the restructure. The liquidators brought a claim against the bank based on the rule in Barnes v Addy.
The Court held that Westpac was liable under the knowing receipt limb because it had required a restructuring of the loans to the company on much harsher terms than the previous security arrangements.
Westpac knew that the directors would be in breach of their fiduciary duty by agreeing to grant the securities, but called in the securities when the company went into liquidation. Knowing Assistance The elements that must be satisfied in order to establish liability under the second limb of Barnes v Addy are: There must be a fiduciary or a trustee; Who develops a fraudulent or dishonest plan or scheme which will result in a breach of duty; The scheme must be developed with the assistance of a third party; Who must know that they are assisting a fiduciary to breach their duty.
In Consul Developments Pty Ltd a solicitor Walton controlled a number of companies engaged in the purchase, development and sale of land, including the company DPC. Grey was the manager of these companies and was precluded by his service agreement from dealing in real estate on his own account.
Walton employed Clewes in his legal practice as a clerk. Clewes ran a family company Consul which was also engaged in property development. Grey and Clewes entered into an arrangement that Consul should purchase properties that Grey found and that Grey and Consul should share the profits on sale. Grey had told Clewes that DPC was not interested in the projects for lack of finance. The plaintiff argued that the properties purchased by Consul were held on constructive trust for the plaintiff DPC and that there was constructive notice sufficient to attract the liability of a third party Consul on a Barnes v Addy basis.
The High Court found Grey liable by virtue of his breach of fiduciary duty, but held that Consul was not liable as a third party. In order to attract liability for knowing receipt, the High Court held, the third party must have knowledge corresponding to the first three Baden categories, while for knowing assistance, any of the first four categories would be sufficient.
The two companies entered into a joint venture in to buy and redevelop No 11 Deane Street, Burwood.Realtors' Fiduciary Duties - OLD CAR
The four run-down units at No 11 Deane Street were refurbished and rented out, prior to a planned demolition. Farah submitted a development application DA to Burwood Council for a combined commercial-residential project. The Council rejected it as it was too big for an metre-wide site with no room for parking.
In those circumstances, the development would require amalgamation with adjacent blocks to be feasible. Mr Elias gave evidence that he had invited Ms Dagher and Ms Elias to join in the purchases of Nos 13 and 15 but they declined for financial reasons. Say-Dee declined and relations deteriorated.
Problems spiralled, with the project having stalled, rents not meeting mortgage repayments, all three principals in financial difficulty.
Ms Elias was diagnosed with cancer. In MarchFarah filed a summons against Say-Dee seeking an order that a trustee be appointed over No 11 and that it be sold. At first instance, Palmer J gave judgment for the Farah group, made orders for the sale of No 11, and dismissed the cross-claim. The Court of Appeal also held that the Council regarded the acquisition of Nos 13 and 15 and their amalgamation with No 11 as essential if No 11 were to be redeveloped to its full potential.
The Court of Appeal declared that Mrs Elias and her daughters held their units in Nos 13 and 15 on constructive trust in favour of the Farah-Say-Dee partnership, and appointed receivers to obtain development consent and sell all their blocks together.
It accepted that Say-Dee was aware the Council had rejected the DA and that the problem might be overcome by developing No 11 with adjoining land, and that Mr Elias had invited Ms Dagher and Ms Elias to participate in acquiring Nos 13 and 15 but they had declined. The Court rejected the grounds on which Mrs Elias and her daughters could have been made constructive trustees on behalf of Say-Dee and held that they were not liable to Say-Dee in any way.
Generally, where accessorial liability is established, the Court is concerned give a remedy that is adequate. Issues of increase in value of property and insolvency abound.
Regularly, a constructive trust is the minimum equity to give the plaintiff adequate redress for the breach. So, if the purchase money is provided by two or more persons jointly and the property is put into the name of one only, any absence of a relationship giving rise to a presumption of advancement, there is presumed to be a resulting trust in favour of the other contributors: