TRACING ASSETS: A CASE FOR THE

Transcription

1 TRACING ASSETS: A CASE FOR THE FUSION OF COMMON LAW AND EQUITY IN EINGLISH LAW* THE relation of common law to equity with regard to the tracing of assets is far from being simple. The remedies available for tracing are, regrettably, still plagued by the continued significance of the different rules at common law and in equity. It is intended in this paper to state, examine and evaluate, as briefly as possible, these divergences and to propose methods of achieving a reconciliation between the two branches of the law. The divergences relate principally to the requirement of nonadmixture of money at common law; the requirement of a fiduciary relationship in equity; the rights of bona fide purchasers and, finally, the rights of innocent volunteers. A. REQUIREMENTS OF NON-ADMIXTURE AT COMMON LAW AND OF FIDUCIARY RELATIONSHIP IN EQUITY At common law property can be traced if it has remained in its original state or is represented by other property obtained in its place by its sale or exchange. This right, however, ceases once there is an admixture of the claimant s property with that of the wrongdoer. As Lord Ellenborough, in his classic exposition of the subject, put it *: ( It makes no difference in reason or law into what other form different from the original the change may have been made... for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description. The difficulty which arises in such a case is a difficulty of fact and not of law.... The consequence to a plaintsiff in the case of such an admixture is that his claim would have to abate, in the event of the wrongdoer s insolvency, proportionately with the claim at law of other unsecured creditors of the wrongdoer. Such a result is no doubt curious. Why, indeed, should the fact of an admixture defeat the plaintiff s right * This Article is an extract from a thesis (Study of the Inter-Relationship of the Legal and Equitable Proprietary Remedies in English Law) which I submitted as a Research Student of University College London for the Doctor of Philosophy Degree. 1 Taglor v. Pltcmer (1815) RI. & S. 562,

2 JAN TRACING ASSETS 13 to trace? Ought the legal remedies to have been so restricted? These questions will be considered later.2 The above common law limitation would not, however, matter greatly if better and alternative tracing remedies were available in equity. Such remedies, which allow tracing into mixed property, do in fact exist in equity.3 Until Re Diplock and indeed until the first half of this century it was thought that the better equitable remedies were available to any claimant. An instructive case is Banque Belge pour 1 Etranger v. Hambroucks where Hambrouck, by fraudulent means, obtained money from the plaintiff s bank, paid it into his account with Farrow s Bank and paid some of this money to his mistress, a Mlle. Spanoghe, who in turn paid it into her deposit account with her own bank. The plaintiffs claimed that the sum of E815 remaining to Mlle. Spanoghe s credit was their property. Scrutton L.J. decided O the case on equitable grounds. So far as the common law claim was concerned he considered the defence that the payment into Hambrouck s bank and the drawing out of other money in satisfaction had changed the identity of the money. Atkin L.J.,? however, went further and considered that the plaintiffs could succeed with either a common law or equitable remedy. The better and alternative equitable remedies have, however, developed as remedies of limited application, for in 1948 the Court of Appeal in Re Diplock laid it down that before a right to trace can be granted in equity, either there must be a fiduciary relationship between the claimant and the defendant who holds the property, or, as a result of a fiduciary relationship between the claimant and another person through whose hands the property has previously passed, some equitable proprietary interest must have become attached to the prop~rty.~ In other words, there must See pp. 7-10, post. In equity if the recipient has exchanged the claimant s property for other property, the claimant can either take the product (this is the case of a con- structive trust) or he can have a lien on it for the value of his property. But it the recipient has mixed ithe claimant$ property with his own 80 that it is no longer identifiable, the claimant is entitled to a charge on the property purchased for the amount of the trust money laid out in the purchase. See Re Hallett (1879) 13 Ch.D. 696, 709, per Sir George Jesse1 M.11,. Where the mixed property has however increased in value, Re Tilley s Will Trust [1967] 2 All E.R. 303 supports the tiew (at pp. 30%310) that khe beneficiary is entitled to share in the profit. 4 [1948] 1 Ch. 465 (C.A.) 6 Ibid. at p [1921] 1 K.B Ibid. at pp [I Ch In this case a testator had by his will directed his executors to apply his residuary estate for such charitabl: institutions or other charitable or benevolent object or objeotss in England 8s they should in their absolute discretion think fit. The executors distributed a large part of the residue among 139 charities before the next-of-kin of the testator challenged the validity of the original bequest, which was held by the House of Lords to be invalid. The clsima of the next-of-kin against the executors of their estates were compiomised but a number of claims (persona.1 and proprietary) were brought against the charities who were regarded as innocent volunteers. 9 [1948] 1 Ch. 465, 530.

3 14 THE MODERN LAW REVIEW VOL. 34 exist an initial fiduciary relationship. At common law, on the other hand, the right to trace does not depend upon there being a fiduciary relationship between the parties. Why, then, one is impelled to ask, has equity imposed this requirement? The reason, it is believed, can be traced to the once divided jurisdiction of the Common Law and the Chancery courts. Before the fusion in 1878 of the two by the Judicature Acts they existed as separate and distinct courts, and the fiduciary obligation, it appears, was then the means historically of conferring jurisdiction upon the aourts of Chancery. The Chancery courts granted relief only to those with a claim in equity who wished to follow their property into the hands of trustees and other fiduciaries entrusted with the possession of the property. On *the other hand, the common law courts also granted relief only to legal owners. The common law gave no relief to one who had only an equitable title such as a cestui que trust or a beneficiary under a will. Now, however, that both the common law and equity jurisdictions have been combined, there certainly appears to be no justification for insisting on this requirement, any longer.lo Although the Judicature Acts of l1 did not fuse the rules of equity and law which therefore still remain distinct bodies of law governed largely by different principles, yet sections 24 and 25 of the Act of 1878 laid down the principles upon which law and equity were to be Concurrently administered. Thus, in any action brought in the High Court in which the plaintiff claims to be entitled to any equitable right or remedy against the defendant, or the defendant relies on any equitable defence to sthe plaintiff's claim, the. court is directed to give the same effect to the claim or defence in question as the court of Chancery would have done had the matter been raised before it in the old days. Indeed, the re-creation of this distinction between law and equity is most unfortunate, posing, as it were, the greatest problem yet to the relationship of the two branches, for it means that though the legal remedies are for some reasons inadequate, yet the equitable remedies, which may be better in the circumstances, cannot be invoked unless a fiduciary relationship exists between the legal owner and the wrongdoer. From the viewpoint of a legal owner and of restitution this is no doubt a most arbitrary limitation. The effects of this limitation in equity may be thus demonstrated: (i) If A's money is stolen by B, a bankrupt, or is transferred to him under a fundamental mistake of fact, A can trace it at common law in priority to B's l2 creditors under the rule established in Tqlor v. PZ~rner.~~ If B has, however, mixed 10 See Professor Maudsley, " Restitution in Enghnd " (1966) 19 Vanderbilt 1J.R. 1123, Now replaced by the Supreme Court of Judicature (Consolidation) Act " B " in either case has a " void " title. 13 (1815) 3 M. & S. 562.

4 JAX: 1971 TRACING ASSETS 15 the money, A is barred from tracing it at common law. On the other hand, as the law stands, A cannot trace it in equity because there is no fiduciary relationship between himself and the rogue. (ii) Where A s money has been transferred to B because of B s fraud or duress or under a mistake of fact which is not sufficiently fundamental, A can trace the money at common law from B l4 in preference to B s creditors, provided A is still entitled to and does rescind the transaction. However, if B mixes it with his own money, A can no longer trace it at common law and since there is no fiduciary relationship between him and B, he will not be allowed to trace it in equity. (iii) If, having obtained the money as above, B passes the money either with notice of its origin to someone else or to a volunteer who mixes it with his own money, A cannot trace it at law or in equity. (iv) Where the money has been put in a separate account in a bank so that it has not become mixed A can follow it at common law.15 Where, however, B has mixed the money with other money belonging to him, A cannot trace it at common law or in equity. In the above situations the gainers, in the event of B s insolvency, are B s creditors for they share equally with A in B s estate. Undoubtedly, such a result is curious. It is clearly illogical that B s creditors should thus fortuitously benefit from the bankrupt s act at the claimant s expense. It is very unfortunate that the common law itself has up till now not been prepared to remedy these situations. It appears clear, however, that the common law limitation would have not have mattered at all had the Court of Appeal not posited the requirement of a fiduciary relationship as a condition to the right to trace in equity. If we are, therefore, to bring about a fusion, it seems clear that our aim must be to find ways whereby either the common law itself would allow a plaintiff to trace into a mixed fund or, in the alternative, equity would lift its veil so as to enable a legal owner to take advantage of the equitable right to trace property into a mixed fund. Two principal methods are hereby proposed. 1. Z he appropriateness of the common law action for money had and received in ( mixed funds situations While no one can dispute the fact that money once confused or commingled with other money can no longer be specific ally identified, what is, however, open to argument is whether the fact of an admixture should, as laid down at common law, therefore l4 B in either case has a voidable title. l5 See Re Diplock [1947] Ch. 716, 746, per Wynn-Parry J.

5 16 THE MODERN LAW REVIEW VOL. 34 defeat the plaintiff's right to trace. Indeed Lord Greene M.R. in Re Diplock gave certain matters which, in his opinion, are helpful in understanding the limitation of the common law doctrine and the reasons why equity was able to take a more liberal view. He explained l6 that the common law was very materialistic as it could only appreciate the physical identity of a thing, thus regarding money as ascertainable only so long as there was no mixture with other money. This, he explained, was because the theory of tracing was foreign to the common law and this was in turn due to the limited nature of the remedies available at common law, the normal remedy being damages. On the other hand, in equity, the available remedies were, in his view, very wide since equity could provide specific relie particularly through the declaration of a charge. Moreover, equity adopted a more metaphysical approach as it regarded a mixed fund as capable of being resolved into its component parts. Indeed, while it is questionable whether *the common law was ever materialistic in its approach, there can be little doubt from the above that Lord Greene must have overlooked the fact that it was not, as suggested, a question of dissolving a mixed fund; on the contrary what the claimant is here seeking to establish is a right to an equivalent amount of the appropriated money in the mixed fund. Indeed, there is, it is submitted, nothing in the nature of the common law action for money had and received 1' which makes it unsuitable for tracing appropriated money in a mixed fund. A plaintiff in this action can only obtain the restitution of an equivalent amount and not the identical coins, the reason being that since one coin cannot be distinguished from another the property in the original coin is deemed to have passed to the transferee. Assuming, however, that the coins or banknotes are even distinguishable, they cannot, once paid out as currency, be specifically owned any longer so as to be recoverable in specie. A claimant whose money has or has not been mixed with that of the wrongdoer cannot therefore seek to follow the identical coins. All he can actually follow is an equivalent amount of the appropriated money. Nothing, $therefore, should have prevented the common law courts from allowing the action for money had and received, which lies for an equivalent amount only, in a case where the money has become mixed with that of the wrongdoer. To refuse recovery merely because the coins have been mixed and have thereby become indistinguishable indeed appears to me to be not only objectionable but also irrelevant in the circumstances. Commenting on Lord Ellenborough's statement in the case of Taylor Y. Plumer Professor Stoljar had this to say 19: [1948] 1 Ch. 465, ' For a detailed historical account, see Jackson, History of Quasi-Cotttrocl ; Holdsmorth, History 01 English Law, Vol. 111, pp (1815) 3 M. & S Law of Quasi-Contracts, pp

6 JAS TRACING ASSETS 17 This distinction between mixed and unmixed funds had of course one bold purpose, namely, to widen the concept of specific property so as to defeat [the principal s] liability in trover and thus to preserve his priority. Yet in making this distinction the decision not only reaffirmed that money could not be followed once it had become mixed or commingled with [the agent s] but it also solidified a much deeper misunderstanding. The point is that since [the principal] was claiming from [the agent] an equivalent amount, not specific coins, the question whether [the principal s] money was mixed or unmixed was not really relevant.... And since Taylor v. Plumer was the last decision stating the wider common law principles it was the decision that was used for the contrast with equity. So Jesse1 M.R. remarked that Lord Ellenborough when enunciating the distinction between mixed and unmixed funds, must have been unaware of this refinement of Equity by which the means of ascertainment still remain, the refinement being that equity could create a charge on the mixed mass of money thus giving the owner a right to the same quantity. And thus was it overlooked that the same refinement existed at common law. Simply because money had and received also gave a right to the same quantity we might just as well have said that it too created a charge upon the mixed mass. It is therefore submitted that a legal owner whose money has been mixed with the wrongdoer s should be able to trace it at common law by bringing an action for money had and received. He would thus be entitled to a preference over the wrongdoer s unsecured creditors in the event of the wrongdoer s insolvency. Moreover, there would be no need for him to want to take advantage of the equitable right to trace into a mixed fund. Obviously, this degree of fusion is most desirable since it ensures that the objects of both sets of tracing rules will be the same. 2. Extent to which the1 equitable remedies should be allowed but the fiduciary relationship element be circumvented or jettisoned The right to trace in equity under American law arises w,henever a person takes the legal title to property but on the ground of unjust enrichment cannot be allowed to claim the beneficial title.20 In other words, American law, unlike English law, is willing to sever the beneficial ownership from the legal ownership in order to provide a proprietary remedy. Indeed the speech of Lord Dunedin in Sinclair v. Brougham 21 came very close to this doctrine. After enunciating the proposition that ( all ideas of natural justice are against allowing A to keep the property of B which has somehow got into A s possession without any intention on the part of B to 10 See the definitions of Constructive Trust and Eauitsble Lien in nsm. 160 of the American &statement of Restitution. See hlso Beattv-v. Guigen: heitn Ezploration Co., 225 N.Y. 380, 386, per Cardozo J. (1919). 1 [1914] A.C. S98,

7 18 THE MODERN LAW REVIEW VOL. 34 make a gift to A he described the equity involved in the action for money had and received as, in his view, based on inherent ideas of justice but after explaining that that action was ineffective where there was an ultra vires contract he then adduced parallels from Roman Law and Pothier and went on to say that English equity could also supplement the common law when her remedies thus proved inadequate. He said 22: I think [equity] can always in the exercise of [its auxiliary] jurisdiction help the common law by tracing, and can say that if the- proceeds of property can be shown to be what I have called a superfluity in the person of the recipient, then it will hold that that property is traced just as surely as it was still in the original form. To do this is to give full effect to the doctrine of ultra vires-for the party receiving is not ordered to pay as a debt the equivalent of what he originally got, but ordered merely to surrender what he still has as a superfluity, an enrichment which, but for the original reception of the money, he would have been without. At no time in his speech did Lord Dunedin mention that a fiduciary relationship was a sine qua non to the right to trace in equity. He was no doubt more concerned with the wider horizons of specific restitution. Regrettably, however, his view about the nature of the right to trace in equity has not prevailed in England in its widest sense. As Lord Greene M.R. said in Re Diploclc zs: Regarded as a pure piece of machinery for the purpose of tracing money into a mixed fund or into property acquired by means of a mixed fund, a declaration of charge might be thought to be a suitable means of dealing withany case where one person has, without legal title, acquired some benefit by the use of the money of another-in other words, any case of what is often called unjust enrichment -the opinion of Lord Dunedin in Sinclair v. Brougham appears to us to come very nearly to this, for he appears to treat the equitabie remedy as applicable in any case where a superfluity, expressed or capable of being expressed in terms of money, is found to exist. Such a view would dispense with the necessity of establishing as a starting point the existence of a fiduciary or quasi-fiduciary relationship or of a continuing right of property recognized in equity. We may say at once that, apart from the possible case of Lord Dunedin s speech, we cannot find that any principle so wide in its operation is to be found enunciated in English law. Indeed, as has been shown elsewhere,24 the common law and the Chancery courts existed, before their fusion in 1873 by the Judicature Acts, as separate and distinct courts and the fiduciary obligation was then the means historically of conferring jurisdiction 21 Ibid. at p [l948] 1 Ch. 465, At p. 14.

8 JAX TRACING ASSETS 19 upon the courts of Chancery. The Chancery courts granted relief only to those with a claim in equity who wished to trace their property into the hands of trustees and other fiduciaries entrusted with the possession of the property. Thus applied, the equitable remedies had nothing to do with unjust enrichment as such. The right of the beneficiary was merely the right of the equitable owner to attach his property just as the owner at law could trace with the actions of money had and received, trover or detinue. However, there is no reason why the right to trace in equity cannot now 25 be rationalised, as the American courts have done, along the lines of unjust enrichment. Surely, if it can now be recognised that the principle behind the grant of the right to trace is the remedying or the prevention of unjust enrichment, much of the problems now facing us would no doubt have been solved. The problem, however, is how we can bring this about. In this connection two schools of thought have emerged in England. The first school of thought led by Professor Waters 26 has suggested that the fiduciary relationship can be circumvented, while the second school of thoug.ht led by Goff and Jones 21 has suggested that the requirement of fiduciary relationship should be entirely jettisoned. Professor Waters asserts that there are examples in the precedents both of situations where the relationship was already in existence when the wrongful act was performed and situations where the relationship arose at the same time as the performance of the wrongful act.28 Within the precedents on these latter situations, Professor Waters writes, English law can free itself from its self-imposed refusal to remedy unconscionable retention by the non-fiduciary. For evidence that such an ad hoc fiduciary relationship can arise he quoted the words of the Court of Appeal in Re Diploclc 29 commenting upon Sinclair v. Brougham thus : " It is to be observed that neither Lord Parker nor Lord Haldane suggests that thc equitable remedy extends to cover all cases where A becomes possessed of money belonging to B, a view which Lord Dunedin seemed inclined to accept if he did not actually do so. Lord Parker and Lord Haldane both predicate the existence of a right of property recognized by equity which depends upon there having existed at some stage a fiduciary relationship of some kind (though not necessarily a positive duty of trusteeship) sufficient to give rise to the equitable right of property. Exactly w.hat relationships are sufficient to bring such an equitable right into existence for the purposes of the rule which we are considering is a matter which has not been precisely laid down. Certain relationships 25 After all, the jurisdictional distinction has long been abolished. Waters, Constructive Trust (1964), pp Goff and Jones, Law of Restitution (1966), pp , Op. cit., pp [1948] 1 Ch. 465,

9 20 THE MODERN LAW REVIEW VOL. 32, are clearly included, e.g., trustee (actual or constructive) and cestui qwe trust; and fiduciary relationships such as that of principal and agent. Sinclair v. Brougham itself affords another example. There, a sufficient fiduciary relationship was found to exist between the depositors and the directors by reason of the fact that the purpose for which the depositors had handed their money to the directors was by law incapable of fulfilment. Commenting on the above, Professor Waters said 30 : Now how exactly did this relationship between depositors and directors become fiduciary? It certainly was not the pre-existing fiduciary relationship which arises from agency, as the court admits, because the directors were agents of the society, not the depositors. On the other hand the court rejected that it could simply have arisen from unjust enrichment; Lord Dunedin was roundly criticized for this view. But it is very arguable that the Court of Appeal in Re Diploclz rejected the term and accepted the principle.... The truth of the matter is that the depositors paid their moneys to the society in the mistaken belief that the society was entitled to borrow and invest moneys as a banker. The ultra vires rule... led to the contortion,that the moneys had in fact been paid to the directors, and if the mistaken depositors were to recover their moneys it had to be shown that the depositors could bring their claim against the society which, of course, held the moneys. The depositors were in fact saying to the society, we want back our moneys which we handed to you because we and you mistakenly thought you were entitled to receive it as bankers. The offence, therefore, was in the society s, or if one has to put it this way the directors receipt. And this mistaken payment and mistaken receipt was enough to create a fiduciary relationship between the payors and the payees. The present writer cannot think that the contortion produced by the ultra vires rule, namely, that the payees were the directors, makes any difference of principle. The directors received in order It0 pay into the society s assets, it is true, but that being impossible by law they thereby became on receipt fiduciaries towards the payors. Had there been no ultra vires objection to the straight-forward statement that the society was the payee, however, the society upon receipt would surely have become a fiduciary for the same reason. The law prevented it from holding as a banking debtor, and the purpose for which the payors had handed over their moneys was similarly by law incapable of fulfilment. From the above he then drew the following deductions 31: If A pays B under a common mistake as to the legality of what B is to do in consideration, and then B mixes or goes bankrupt or passes the moneys to an innocent volunteer who 30 Op. cit., p, Ibid. at p. 72.

10 Jas TRACING ASSETS 21 mixes, A should have the remedy of the constructive trust against B or against the volunteer.... If he who obtains by false pretences is under a pre-existing fiduciary relationship and the relevant aspect of the duty has been breached, the victim can make the obtainer a constructive trustee or trace. But if the obtainer is a stranger and obtains property as consideration for a purpose, for example, supplying goods which cannot be carried out, again, for example, because there is no supplier as alleged and no such goods, then is the victim not in fiduciary relationship with the obtainer? ) Professor Waters however went on to observe 32 that where the gap between this ad hoc relationship and the principle of unjust enrichment occurs is in cases of larceny. It is difficult to see how fiduciary relations of any sort can arise when the owner of the property does not consent to the control over the property passing to the transferee. He argued however: This may be the real stumbling block of Sinclair v. Brougham. But at least as Andrews J.= pointed out all those years ago, when the law recognises that the offence itself may give rise to the aspect of fiduciary relationship which is breached by the offence, we are not far away from conceding finally that there is no logical distinction between the passing of property as a result of mistake or because of fraud, and the loss of it by theft. On the other hand, Goff and Jones have suggested that the requirement of fiduciary relationship should be entirely jettisoned as a condition precedent to the right to trace in equity. They said s4: We are not persuaded that the requirement of fiduciary relationship is either necessary or just in this context. Apart from the grave difficulties of determining who is a fiduciary, the consequences of the requirement can be capricious. Suppose that A s money is stolen by a stranger, B, who mixes the money with his own money in his bank account. On the authorities as they stand, A cannot follow his money in Equity. But if the thief B had been A s fiduciary agent and had stolen money entrusted to him, then A could have followed his property in Equity since a fiduciary relationship would have existed between the parties. B mill generally be a man of straw so that the contest will be between A and B s general creditors. In these circumstances A should surely have priority over the general creditors of B. It is unjust that the general creditors should fortuitously benefit at the claimant s expense from the act of the bankrupt Ibid. 33 Newton v. Porter, 69 N.P. 133, 139 (1877). 34 Op. cit., p See also Professor Maudsley (1959) 75 L.Q.R. at p. 242 who a;tgues to similar effect. S:e also another article by Professor Maudsley, Restitution in England (1966) 19 Vanderbilt L.R. 1123, 1136.

11 22 THE MODERN LAW REVIEW VOL. 31. And later 30: " In our view the courts should, in the present context, abandon the requirement of fiduciary relationship and recognise that equitable proprietary rights may be granted to prevent unjust enrichment. Each case should be considered on its merits to decide whether the claimant should have the additional benefits which proprietary rights afford. These benefits should, we suggest, be allowed to a legal owner whose property has come into the hands of another, to enable him to take advantage of the equitable right to trace property into a mixed fund. '' Ideally, no one can challenge that the fiduciary relationship ought to be jettisoned. The issue, however, is how we do it. It is felt that this matter will have to be dealt with by the legislature. With regard, however, to its circumvention Professor Waters, as we have seen, was trying to explore how far it was possible for the courts with the existing case precedents to bring about the same result. Either of these suggestions will no doubt bring about a reconciliation of common law and equity, thus ensuring that where the legal remedies are inadequate, the equitable remedies will be invocable. I shall now proceed, in the remainder of this paper, to discuss two further limitations which may yet inhibit a claimant, who, on the principles earlier on discussed, has a right to trace property at law or in equity, from recovering his property. These limitations concern the rights of bona fide purchasers and innocent volunteers. It will again be seen that the approaches of common law and equity are diametrically opposed to one another. B. THE RIGHTS OF BONA FIDE PURCHASERS In equity the right to trace cannot be enforced against a bona fide purchaser without notice. Thus, where a trustee in breach of his trust sells the trust property to one who purchases for value without notice the bona fide purchaser cannot be declared a constructive trustee of the property.&' In this case the purchaser is deemed to have obtained the legal estate without any privity to the breach of trust, and equity will not therefore curtail his enjoyment of it in favour of the beneficiary, This is the limiting factor in relation to the enjoyment of equitable interests in property. Similarly, such a purchaser cannot have the equitable lien or charge impressed on a fund in his possession which is comprised of trust money.38 At common law, on the other hand, the rights of a bona fide purchaser are limited in scope, for a purchaser cannot acquire a better title than that of his seller.39 This ancient rule is commonly 36 op. cit., p Sea Pilcher v. Rawlins (1872) L.R. 7 Ch.App. 259, 268, per James L.J. 38 See Thompson v. Clydesdale Bank [1893] A.C. 289; Taylor v. Blakebck (1886) 32 Ch.D Whistler v. Porstcr (1863) 14 C.B.N.S. 248, 257.

12 JAS TRACING ASSETS 23 expressed in the maxim nemo dat quod non habet and represents the law s desire to protect property rights even though innocent third parties may suffer in consequence. 40 There are, however, a number of exceptions to this rule, most of which owe their origin to the need to facilitate commercial transactions. The main exception relates to transfers of money. If, for example, A wrongfully takes B s money and pays it over to C who in good faith gives value for it, B will be unable to recover it from C.41 T,here are at least two reasons for denying B restitution. In the fist place, it is most impracticable for the taker to investigate the true title of money. As Lord Haldane well put it in Sinclair v. Brougham 42:... If a sovereign or banknote be offered in payment it is, under ordinary circumstances, no part of the duty of the person receiving it to inquire into title. The reason of this is that chattels of such kind form part of what the law recogni ses as currency, and treats as passing from hand to hand in point not merely of possession but of property. Secondly, the convenience of business and the ordinary affairs of life demand the existence of a medium of exchange freely transferable. Transferees of goods are not, however, treated as favourably as transferees of money. A transferee of a chattel can only acquire a better title than his transferor s if he can show that he bought in market overt in good faith and without any notice of any defect in the title of the seller 43; or that he bought in good faith from a seller who had a voidable title not avoided at the time of sale.i4; or that he purchased in good faith from a person in possession of goods with the owner s consent or that he purchased under any special common law or statutory power or under the order of a court of competent jurisdi~tion.~~ The above, then, are.the occasions when a transferee of goods may acquire a good title. One must, however, admit the fact that such a transferee is not widely protected. Where, for instance, a. person has bought in a place which is not under the present law recognised as a market overt he may be sued in trover or detinue by the original owner. While this limitation may be justified on the ground that a person, whose goods have, for example, been stolen, should be enabled to retain his title to his goods, there is also much to be said for the view that a person who has bought in good faith without notice of defect in the title of 40 Law Reform Committee, 12th Repopt, at p See Miller V. Race (1758) 1 Burr. 452, , per Lord Mansfield. 42 [lgli] A.C. 398, Sale of Goods A& 1893, Ibid. s See Factors Act 1889, 6s. 2, 8 and 9. Ih woudd appear, however, that and 9 are substantially reproduced by (i) and (ii) of the Sale of Goods Act See also Hire Purchase Act 1964, G Sale of Goods Act 1893, s. 21 (2) v).

13 24 THE MODERN LAW REVIEW VOL. 34 the seller should not be deprived of the goods. The paramount factor in these cases, it is submitted, should be the need to protect commercial transactions. The views and recommendations of the members of the Law Reform Committee '' on the " market overt )' rule and other matters relating to transfer of title to chattels are, on this score, very convincing. Indeed with the exception of one recommendation all their recommendations favour innocent pur- chasers. It is hoped that the Committee's recommendations will be adopted. Much will indeed thereby be done towards achieving a uniformity between common law and equity with regard to tracing into the hands of bona fide purchasers. C. THE RIGHTS OF INNOCENT VOLUNTEERS The position in equity can be stated in a number of propositions. (i) When the innocent volunteer, after mixing the money with his own, unmixes it by demonstrating an intention to use the particular money in question for a particular purpose and the money so used is identifiable, it can be traced.'a (ii) Where a volunteer takes without notice and there is no question of mixing, he must hold the money on behalf of the true owner, whose equitable right to the money still persists as against him.'o (iii) Where, however, the fund is mixed, the position is different. If the mixed fund is in an active, unbroken banking account, any depreciation is borne between the true owner and an innocent volunteer in accordance with the rule in Clayton's Case,50 namely, first in, first out. Commenting on this rule in Re Diplock the Court of Appeal said sl: '' This is really a rule of convenience 52 based upon so-called presumed intention. It has been applied in the case of two beneficiaries whose trust money has been paid into a mixed banking account from which drawings were subsequently made.... In such a case both claimants were innocent, neither is in a fiduciary relation to the other, and if the mixed fund had not been drawn upon they would be entitled to rateable charges upon it. Exactly the same occurs where the claimants are not two beneficiaries but one beneficiary and one volunteer, and we think, accordingly, that the same principle should be adopted. However, if the mixed fund is not in such an active banking account, then any loss is borne pari passu, so that the parties 47 Embodied in their 12th Report. a Re Diplock [1948] Ch. 465, Ibid. ak P (1817) 1 Mer [1948] Ch. 465, This " rule of convenience " does not however apply between a fiduciary and the claimant. See generally Goff and Jonea, Law of Restitution (1966) at pp

14 JAN TRACING ASSETS 25 recover rateably in proportion to their contributions. This point first arose in Sinclair V. Br~ugharn,~~ where, on the winding up of a building society, which had also carried out an ultra vires banking business, both the depositors and the shareholders were held entitled to bear the shrinkage rateably in proportion to each individual contribution. Explaining why the depositors should share pari passu with the shareholders (who were not bona fide purchasers) Lord Parker said 54: Suppose... that the fiduciary agent parts with the money to a third party who cannot plead purchase for value without notice, and that the third party invests it with money of his own in the purchase of property. If the third party had notice that the money was held in a fiduciary capacity, he would be in exactly the same position as the fiduciary agent, and could not, therefore, assert any interest in the property until the money misapplied had been refunded. But if,he had no such notice this would not be the case. There would on his part be no misconduct at all. On the other hand, I cannot at present see why he should have any priority as against the property over the owner of the money w,hich had, in fact, been misapplied. In Re Diplock the Court of Appeal quoted the above with approval and held its rationale to be applicable as between the real owner and some of the charities.ss (iv) The right to trace is lost 56 if it would be inequitable to allow the claimant to trace, for example, where an innocent volunteer has spent the claimant s money to alter or improve his land and where the innocent volunteer uses the claimant s money to pay off debts.57 Three reasons were given in Re Diplock for refusing the right to trace where the money has become mixed with land, viz. : (a) it may not add to the value of the premises; (b) it is difficult to know to what property the charge would attach-the whole of the property of the defendant, or just to the part of the building which was improved; and (c) that both parties must submit to equality of treatment, and as the charge can only be realised by sale, this puts an unfair burden on the volunteer. He.has no equivalent remedy against the chargee. And the case where the money has been used to pay off debts is also treated like that of improvements to land; the money has been used to clear a blot on the title [1914] A.C Ibid. at pp [1948] Ch. 465, 530. The right to trace is also lost, however, if the olaimant s property disappears, for example, if a delelidant buys, with the claimant s money, a bott!e of whisky and drinks it. Improvements to land: see Rc Diplock [1916] Ch. 465, Payment of debts: see &id. at pp But see comment by Goff and Jones, Law of Rcstitution at

15 26 THE MODERN LAW REVIEW VOL. 34 It is clear from the foregoing that an innocent volunteer is treated on certain occasions most favourably in a court of equity. The question, however, arises whether this kindly treatment can be justified. On the well-established principle of equity that the owner of an equitable interest in property has a right which he can assert against the whole world with the one exception of a bona fide purchaser of a legal estate for value without notice of a breach of trust the true beneficiaries under the will in Re Diplock had an equitable title 20 the trust funds in the hands of the actual recipients; who, because they had given no value, were mere volunteers. Therefore, under the equitable tracing rules the unpaid beneficiaries were entitled to follow the trust moneys into the volunteers banking accounts in which those moneys had been mixed with the volunteers own moneys. What justification then is there for the rule in Clayton s Case or that of rateable division to be applied between an actual owner and an innocent volunteer? Equally, what justification is there for denying a true owner the right to trace his money because the innocent volunteer has used the money on improvements to his property? It is no doubt true that a total denial of relief to the volunteers in certain circumstances would have been indefensible. To overlook, however, as the Court of Appeal did, the fact that a person with an equitable right over any property can enjoy that right against anyone except a bona fide purchaser for value without notice is, it is submitted, totally unacceptable. Indeed, Goff and Jones after criticising the application of the pari passu rule in Sinclair v. Brougham and Re Diploclc have given the ideal solution. They said 5s: In principle, the ideal solution in Re Diplock would... have been to have allowed the next-of-kin to follow their money into the hands of the charities and, because of their equitable right of property, to take priority over them. At the same time, the courts should have permitted the charities to plead the defence of change of position, so that if the charities had bona fide undertaken expenditure which would not have been incurred but for the mistaken payment and which was of such a character that it would be inequitable to enforce the claim, the next-of-kin s proprietary claim would have been defeated. The above solution instead of the rule in Clayton s Case should also have been applied in cases where moneys belonging to a claimant and an innocent volunteer were inextricably mixed in an active banking account and had become depreciated through withdrawals. It should equally have been applied in the cases where the volunteers have spent the money on improvements to their land.sd It is, however, a matter for regret that the English equitable tracing remedies still lack any developed defence of change of position. The reason, 58 Loto of Rsstitrrtioti (logg), p Ibid. at p. 486.

16 JAN TRACING ASSETS 27 as various writers have expressed, is believed to lie in the failure of the English courts to recognise the true nature of the equitable tracing remedies--that he who is unjustly enriched must restore. There can be no doubt that had English law any notion of unjust enrichment the Court of Appeal in Re Diplock would have been able adequately to balance the equities involved in that case. It is hoped that its recognition as a defence will not be very long. On the other hand, at common law, an innocent volunteer must restore the property. The leading case is Banque Belge v. Hambrouck,60 the facts of which have been given elsewhere. To the contention of counsel for the mistress that since she took the money without notice of Hambrouck s wrongs, she acquired a title valid against all the world to the money, being a gift to her from Hambrouck, Bankes L.J. said a1 that the payment was made without valuable consideration and for an immoral consideration. She was therefore a volunteer and liable to restore t.he money. Almost similar facts occurred in the more recent case of Transvaal and Delagoa Bay Investment Co. Ltd. v. AtkinsonBZ where a company secretary fraudulently obtained cheques which he paid into his wife s bank account. The wife was unaware that the money belonged to the company and she had spent it on.household things so that there was nothing to pay back. Although Atkinson J. dismissed the personal claim, he, however, expressed the opinion 63 that in view of the decision in Banque Belge v. Hambrouck a right to trace could have succeeded had some of the stolen money been left in her bank account. There is no doubt the plaintiffs would have been able to trace the money because title can only pass to a purchaser for value without notice and not to a volunteer. The question that arises, however, is whether the volunteer at common law should not be allowed to raise the defence of change of position in cases where, as a result of the receipt of property, he has changed his position. For instance, where a transaction between A and B renders B s title voidable, but not void, a subsequent purchaser for value without notice can acquire a good title from B to the property in cases where, before the purchase, A has not rescinded the transaction. If B can thus pass a good title, should it not be conceded that in cases where he has made a gift of the property to C, an innocent volunteer, C should be allowed to raise the defence of change of position if before A rescinds the transaction C has changed his position on account of the receipt of the property? There is no reason, it is submitted, why C should not be allowed this defence at least where he did not know of B s defect in title or had no reason to suspect that B s title was defective. This defence is not, however, also recognised at common law. 60 [1021] 1 K.B Ibid. a.t p [lo441 1 All E.R Ibis. at p. 583.

17 28 THE: MODERN LAW REVIEW YOL 35 The foregoing account of the rights of innocent volunteers undoubtedly reveals a serious lack of a common rationale between common law and equity. In allowing a volunteer either to share pari yassu or to retain the money, equity, it is submitted, is wrong. The common law view that title to property can only pass to a bona fide purchaser for value without notice and which therefore asks the innocent volunteer to restore the property is the better view. Equity should now adopt this view. Both common law and equity should, however, recognise the defence of change of position so that in cases where it would be inequitable to ask the volunteer to surrender, the right to trace will be denied. CONCLUSION The preceding account no doubt reveals the extent at the present day of the divergence of the approaches of common law and equity to the tracing of assets. This is, as I have tried to show, not a satisfactory situation. In this branch of English law a distinction should no longer be drawn between common law and equity. The same rules should, it is submitted, govern the right to trace under both systems of laws. This is an objective that must now be pursued vigorously by the judges and legislators alike. It must, however, be here stressed that the judges rather than the legislators have the essential role to play towards the achievement of this objective. Legislation, after all, is a heavy-handed instrument and there is no reason why law reform should be left to that body alone. Indeed the role of a judge is to develop the law and adapt it to the needs of the members of his society. It is, therefore, of utmost importance that those concerned with the interpretation of the law should strive hard to refurbish its image so that it may remain in touch with the social realities of our time and age. F. 0. B. BABAFEMI.* -* TT..~. (Lond.) rh.d.(loud.), Lectnrer, 17acultj- of Law, IJniversity of Ire, Nigeria.