Tracing (law)
Encyclopedia
Tracing is a legal process, not a remedy, by which a claimant demonstrates what has happened to his/her property, identifies its proceeds and those persons who have handled or received them, and asks the court to award a proprietary claim against the property, or an asset substituted for the original property or its proceeds. Tracing allows transmission of legal claims from the original assets to either the proceeds of sale of the assets or new substituted assets.
Tracing ordinarily facilitates an equitable remedy
, and is subject to the usual limitations and bars on equitable remedies in common law
countries. In many common law countries, there are two concurrent processes, tracing at common law and tracing in equity. However, because the right to trace at common law is so circumscribed, the equitable process is almost universally relied upon, as equitable tracing can be performed into a mixed fund.
For example, if A has money in a solicitor’s account and the solicitor takes that money to buy a painting, then A may be able to make a claim against the painting. This claim will take priority even if the solicitor is bankrupt and has other unsecured claims against him.
Judicially, probably the most famous example of a tracing claim is AG for Hong Kong v Reid [1994] 1 AC 324, [1994] 1 NZLR 1 (PC), where Mr Reid, then the Solicitor General
for Hong Kong
, received bribes for passing information to organised crime
in Hong Kong. Under Hong Kong
law, the proceeds of those bribes were held on constructive trust
s for the government of Hong Kong. Mr Reid then investing the proceeds of the bribes in land in New Zealand
, and the land increased substantially in value. When he was caught, Mr Reid admitted that the money was subject to a constructive trust, but argued that he should only be liable to repay the amount of the bribes, and then any profit attributable to the increase in value of the land in New Zealand was not connected with his wrongdoing. However, the Judicial Committee of the Privy Council
held that the government of Hong Kong's claim to the money could be traced into the land, and thus the claimant was entitled to the full value of the land, as without his wrong, Mr Reid would never have made those profits and it would be grossly inequitable for him to keep them.
Importantly, in each case it is only the remedy of tracing that is lost. The claimant may well still enjoy a personal claim against the wrongdoer, even though they may have lost their proprietary right to trace into substituted assets.
If an asset appreciates in value, the claimant may be well advised to claim proprietary right in the asset (no.1 and 4). If an asset depreciates in value, the claimant would be better off if he acquires a charge or lien over the asset (no. 2 and 3) as he can still enforce the whole amount of the charge against the asset and recover the balance via a personal action.
Tracing ordinarily facilitates an equitable remedy
Equitable remedy
Equitable remedies are judicial remedies developed and granted by courts of equity, as opposed to courts of common law. Equitable remedies were granted by the Court of Chancery in England, and remain available today in most common law jurisdictions. In many jurisdictions, legal and equitable...
, and is subject to the usual limitations and bars on equitable remedies in common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
countries. In many common law countries, there are two concurrent processes, tracing at common law and tracing in equity. However, because the right to trace at common law is so circumscribed, the equitable process is almost universally relied upon, as equitable tracing can be performed into a mixed fund.
Illustrations
"Tracing is thus neither a claim nor a remedy. It is merely a process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property." - Foskett v. McKeownFor example, if A has money in a solicitor’s account and the solicitor takes that money to buy a painting, then A may be able to make a claim against the painting. This claim will take priority even if the solicitor is bankrupt and has other unsecured claims against him.
Judicially, probably the most famous example of a tracing claim is AG for Hong Kong v Reid [1994] 1 AC 324, [1994] 1 NZLR 1 (PC), where Mr Reid, then the Solicitor General
Department of Justice (Hong Kong)
The Department of Justice is the department responsible for the laws of Hong Kong headed by the Secretary for Justice. Before 1997, the names of the department and the position was the Legal Department and Attorney General respectively....
for Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
, received bribes for passing information to organised crime
Organized crime
Organized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...
in Hong Kong. Under Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
law, the proceeds of those bribes were held on constructive trust
Constructive trust
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
s for the government of Hong Kong. Mr Reid then investing the proceeds of the bribes in land in New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, and the land increased substantially in value. When he was caught, Mr Reid admitted that the money was subject to a constructive trust, but argued that he should only be liable to repay the amount of the bribes, and then any profit attributable to the increase in value of the land in New Zealand was not connected with his wrongdoing. However, the Judicial Committee of the Privy Council
Judicial Committee of the Privy Council
The Judicial Committee of the Privy Council is one of the highest courts in the United Kingdom. Established by the Judicial Committee Act 1833 to hear appeals formerly heard by the King in Council The Judicial Committee of the Privy Council (JCPC) is one of the highest courts in the United...
held that the government of Hong Kong's claim to the money could be traced into the land, and thus the claimant was entitled to the full value of the land, as without his wrong, Mr Reid would never have made those profits and it would be grossly inequitable for him to keep them.
Advantages
Tracing claims have two key advantages to claimants.- Firstly, they are a proprietary remedy (as opposed to a simple personal claim) which means that, if the defendant is insolvent, then the claimant can take title to the goods, rather than just receiving an award of damages which may be of little value against a defendant in bankruptcy. However, in some countries tracing may also lead to the award of a personal remedy where for some reason a proprietary remedy is not appropriate (i.e. it would upset pari passu distribution upon insolvency, where it would not be appropriate to do so).
- Secondly, as demonstrated in AG for Hong Kong v Reid, where the wrongdoer has made a profit, it allows the claimant to recover a greater amount than their original loss. The House of LordsJudicial functions of the House of LordsThe House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
applied the same reasoning in Foskett v McKeown [2001] AC 102 where the claimants sought to enforce their rights against a third party.
Technical aspects
The law of tracing is enormously complex, even to practitioners. Characteristically, tracing claims tend to involve fraud, and as a result most claims (and case law) are against the background of a complex factual matrix. However, the law itself is also complex, and a number of key aspects of the law remain ambiguous in many countries.- Equitable tracing requires a fiduciary relationship, while common law tracing does not. However, this relationship does not need to have existed before the misappropriation took place. However, this difference between common lawCommon lawCommon law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
and equity has been criticized by Lord Millett and Lord Steyn in Foskett v McKeown, though they stopped short of deciding that the traditional precondition to equitable tracing should be overruled. - The wrongdoer may mix the misappropriated funds with his own money, and then purchase an asset with the mixed fund.
- Where there are multiple innocent claimants.
- Where there is mixing of the funds by an innocent volunteer.
Defences
In most jurisdictions, there are several reasonably well establishing defences to tracing claims, although the case law is not entirely consistent. The common defences to an equitable tracing claim are:- good faith purchaser for value and without notice
- dissipation
- discharge of a debt (such that the proceeds are no longer traceable and there is no substitute asset)
- innocent change of position (usually, but not always, by an innocent third party)
Importantly, in each case it is only the remedy of tracing that is lost. The claimant may well still enjoy a personal claim against the wrongdoer, even though they may have lost their proprietary right to trace into substituted assets.
Remedies
In common law countries there are a variety of remedies that can be imposed when the court is satisfied that an equitable tracing claim has been made. The principal remedies are:- an election to take the property (or a resulting trustResulting trustA resulting trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor...
) - an equitable charge over the property
- an account of profitsAccount of profitsAn account of profits is a type of equitable remedy most commonly used in cases of breach of fiduciary duty...
, secured by an equitable lien - a constructive trustConstructive trustA constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
If an asset appreciates in value, the claimant may be well advised to claim proprietary right in the asset (no.1 and 4). If an asset depreciates in value, the claimant would be better off if he acquires a charge or lien over the asset (no. 2 and 3) as he can still enforce the whole amount of the charge against the asset and recover the balance via a personal action.
See also
- Macmillan Inc v Bishopsgate Investment Trust plc (No 3)
- Taylor v Plumer [1815] 3 M & S 562
- Tracing in English lawTracing in English lawTracing in English law is a procedure to identify property that has been taken from the claimant involuntarily. It is not in itself a way to recover the property, but rather to identify it so that the courts can decide what remedy to apply...