Tracing (common law & equity)

TR.09 — Tracing (Common Law & Equity)

Tracing is a process, not a remedy. It is the exercise of identifying a value in someone's hands as the substitute for, or product of, the claimant's original property. Following tracks the same asset as it moves; tracing identifies a new asset as representing the old. Once value is located ("traced into" an asset), the claimant then asserts a proprietary claim/remedy (constructive trust, equitable lien/charge, subrogation).

Why it matters: proprietary claims beat a personal claim where the defendant is insolvent (priority over unsecured creditors) and capture increases in value of the substitute asset.

Common law tracing

• Available without needing a pre-existing fiduciary relationship, but cannot trace through a mixed fund — fatal in most fraud/banking cases (Agip (Africa) v Jackson; Lipkin Gorman v Karpnale — money was traceable because identifiable, not truly mixed).
• Remedy is personal (money had and received); no proprietary charge over a mixed account.

Equitable tracing

• Requires an initial fiduciary relationship (Re Diplock; criticised but still applied). Trustees, agents, fiduciaries — and a thief is treated as fiduciary in practice.
• Can trace through mixed funds. Tracing fails only at dissipation (money spent on a dinner, a holiday) — there is no traceable substitute.

Mixed-fund rules

• Trust money mixed with trustee's own money: wrongdoer's money deemed spent first (Re Hallett's Estate); but claimant can "cherry-pick" — if the trustee buys an asset that rises in value, claimant takes the asset (Re Oatway; Foskett v McKeown confirms proportionate share in a profitable asset, e.g. life-policy proceeds).
• Two innocent claimants / mixed trust funds: Clayton's Case first-in-first-out rule — but courts now readily displace it for pari passu/rateable sharing where FIFO is impractical or unjust (Barlow Clowes v Vaughan; Russell-Cooke v Prentis).
• Lowest intermediate balance rule: cannot trace into sums above the account's lowest balance after wrongful withdrawal — top-ups don't restore the trust money (Roscoe v Winder).

Key cases

Foskett v McKeown (leading; tracing is property-based, proportionate share, not discretionary); Re Hallett, Re Oatway, Roscoe v Winder, Clayton's Case, Barlow Clowes, Re Diplock, Agip v Jackson.

Common traps

• Don't confuse tracing (process) with the claim/remedy that follows.
• Backwards tracing (using new asset to discharge old debt) is doubtful but recognised on a transactional/causal link basis (Brazil v Durant PC).
• Equitable proprietary claims are defeated by a bona fide purchaser for value without notice.
• Foskett: rejects "unjust enrichment" framing — proprietary tracing is vindication of property rights, not discretionary.
• Knowing receipt/dishonest assistance are personal claims — distinct from proprietary tracing.