Common Law and Equity: The Differences Between The Rules of Tracing

Outline the differences between the rules of tracing at common law and in equity. Should the rules of tracing at common law be changed so that they are not as restraining as at present?

The law of tracing has historically been beset with confusion about the nature of the tracing process. It is sometimes referred to as a right, remedy or a cause of action. More recently, it appears to have emerged that tracing is neither a right nor a remedy and does not give rise to any cause of action. Rather, it is a process for identifying the location of value as a necessary preliminary step to the making of certain claims. It helps to ensure that a claimant's claim in relation to that value is not defeated when the defendant or a third-party deal with it. This essay explores the many arguments for and against the unification of tracing rules, and considers the advantages and disadvantages of both. Particularly important are the arguments put forward by Lord Millett in support of unifying the two sets of rules, but Rimer J arguing against this highlighted that a few obstacles, for example the requirement of a fiduciary relationship need to be overcome before this can happen. It will be concluded that common law and equitable tracing are indeed distinct at present, and the differences between both must be wiped out before they can possibly be unified. Moreover, the fiduciary requirement should be removed in order to make equitable tracing if both sets of rules are to be unified.

Differences at Common Law and Equity

The main reason for two sets of rules for Tracing is mainly the distinction of rules at common law and in equity historically. Lord Greene explained the difference as a materialistic approach of the common law and a metaphysical approach under equity (Re Diplock 1948). Tracing at common law in respect of the property and any profits derived from it remains possible provided the trust property or its clean substitute is segregated and identifiable, i.e. not been mixed with other property. Under Common law the rules are characterised by a restrictive approach and the right to trace at common is lost once the property has been mixed. Most cases involve a claimant wanting to trace into a mixed bank account, and Lord Goff in the case of Lipkin Gorman v Karpnale highlighted that ‘at common law, property in money, like other fungibles is lost as such when it is mixed with other money.’ On the contrary, tracing in equity assists a beneficiary in the establishment of a proprietary claim over property that has been mixed, which is compared to common law tracing much more flexible and likely to apply to real world scenarios where misappropriated funds are likely to be mixed. Equity will allow the claimant to trace into a mixed fund in the process by which the beneficiary can identify some of the property against which he may establish a new equitable proprietary right, though there is a fiduciary requirement.

Judges and commentators have voiced regret that the law had failed to develop a single system of rules to determine the availability of proprietary claims. This was particularly voiced in the case of Jones FC & Sons v Jones 1996 by Lord Millett, who said that having two distinct tracing rules at common law and in equity was of no advantage, given that tracing is not a remedy neither a right, but merely a process by which a claimant establishes what has happened to his property and claims that the assets which he is claiming can be regarded as representing his property. Lord Millett was persuaded that in fact, there was nothing inherently legal or equitable about the tracing process. Thus, it makes no sense to have two separate rules, and the unification of these rules would be sufficient.

Following Foskett v McKeown, there appears to be authoritative support for future courts to depart from the fully historical approach which was in favour of two set of rules. In the case of Foskett, both Millet and Hope supported a single set of tracing rules applicable both at common law and in equity. Peter Birks also supports this notion that allows tracing to be cleanly separated from the business of asserting rights in relation to assets successfully traced, and argues the process should be viewed as neutral. He has labelled the process of identification as neither legal nor equitable, but rather neutral as to the rights exigible in respect of the assets into which the value in question is traced.

Lionel Smith has even argued that the decision in Taylor v Plumer was decided by a common law court, but the rules of equity were in fact applied seeing as the case concerned equitable rights. Lord Millett agreed, contradicting his previous thoughts in Agip v Jackson regarding the case of Taylor v Plumer. Also, the decision in Agip v Jackson makes clear that tracing at common law is too harsh, and makes it difficult to trace into mixed property, which is entirely in contrast with the flexible possibilities afforded by tracing in equity. This bifurcation has therefore been regarded as unnecessarily convoluted and leads to confusion.

On the contrary, Rimer J in Shalson v Russo 2003 was not persuaded by the decision of Foskett, and established the need to identify that there is indeed a difference between common law and equitable rules of tracing, in specific the need to identify a fiduciary relationship under equity as being a precondition to tracing into a mixed fund. A further difficulty could arise in relation to the fiduciary relationship, for example, with a thief stealing money. Although the victim may trace his money under equity, how can a thief be said to be in a fiduciary relationship with the victim of his own crime? Traditionally equity has required for there to be a fiduciary relationship owing to which the assistance of equity may be invoked. One must agree with Rimer J, and he is correct in saying that the obiter in Foskett was indeed incomplete for failing to recognise this difference. In order for the law on tracing to be clear and coherent it is important to ensure that such anomalies are cleared.

Support for this can be indicated via the other speeches in Foskett. For example, Lord Browne-Wilkinson although in agreement with Lord Millett highlighted that he did not wish to discuss whether the legal and equitable rules of equity are similar or different. Furthermore, Lord Hope did not even make a comment, which could be indicative of the fact that he was not entirely satisfied with the arguments made highlighting that both set of rules are the same. Indeed, the difference between common law and equitable tracing has been around for a long time, Foskett has not swept away this long recognised difference. Therefore, the distinction between both set of rules must be maintained until there is a solution to the need for a fiduciary relationship under equity as opposed to common law tracing.

Following this, certain case law has hinted at the fact that there may not be a need to establish a fiduciary relationship in order to allow equitable tracing. In the case of Agip, Lord Millett was of the opinion that deciding what can be classed as a fiduciary relationship is based on authority, not principle, and is decided on a case-to-case basis and entirely at the discretion of the court. There is no single definition of fiduciary relationship, simply that a person owes a duty of loyalty to his or her principal (Millet in Bristol & West Building Society v Mothew). The courts have been criticised for finding fiduciary relationships just to allow people to access equitable tracing (Campden v Chakrani). Moreover, it is difficult to decide what should happen if a fiduciary relationship has been breached, and whether a proprietary or personal claim arises. This in itself is problematic as highlighted in the cases of Lister v Stubbs, AG Ref v Hong Kong, Sinclair, and FHR v Cedar. This difference is important seeing as proprietary claims are more advantageous and help to access equitable tracing. In the light of the aforementioned arguments, it is argued that the fiduciary factor should be removed, and the process of tracing should be unified.

In the light of the arguments mentioned in this essay, it will be concluded that Rimer J is correct in establishing that the precondition of a fiduciary relationship under equitable tracing still remains a difference between both sets of rules which cannot be ignored. However, the fiduciary factor may not be essential in order to access equitable tracing, so perhaps removing the fiduciary factor may be something which will occur in the future. Moreover, the fiduciary factor may cause problems, for example deciding whether a proprietary or personal claim should arise. The arguments for a unified approach put forward by Lord Millett in specific are incredibly convincing, though one must agree his arguments are incomplete. For the aforementioned reasons, the two set of rules must be kept separately at present. Before a unified approach can be adopted, the issues must be resolved in some way in order to make the law of tracing reasonable.