Tracing And The Importance Of A Proprietary Claim

'Tracing' is an equitable process by which rights in substitute assets are created when the original assets are substituted in an unauthorised fashion for other rights. It should be noted that there are other responses to unauthorised substitutions, most notably the imposition of a 'charge'.

Tracing revolves around the assertion of proprietary rights either in a specific item of property or in its substitute (traceable proceeds). Tracing is an identification process where one asset has been substituted for another.

It would be helpful to note that in a case of a breach of trust by trustees, the first remedial option is to require the trustees to restore the trust fund to its original condition by recovering the property in specie which was originally held on trust. The principles of tracing will apply here in order to require the trustee to deliver up that very specific trust property if it is in his possession or control or to enable a clean substitute for the trust property to be identified and recovered (common law tracing) or its traceable substitute to be acquired and added to the trust fund (equitable tracing).

In Foskett v McKeown, Lord Millett stated that tracing is neither a claim nor a remedy. It is a process. After the process is completed, the beneficiaries may then be able to make a claim. Where a beneficiary can follow a trust property into the hands of a third party, without the intervention of a bona fide purchaser for value without notice, he can assert his equitable proprietary interest and require the asset to be restored to the trust.

Where one asset is exchanged for another, a claimant can elect whether to follow the original assets into the hands of the new owner or to trace its value into the new asset in the hands of the original owner though of course, he cannot recover twice. In practice, his choice is often dictated by circumstances. For example, if the trust property has ceased to exist in traceable form, the beneficiary will seek a personal claim from the trustee.

Insofar as he does not rely on his personal claim, his remedies are proprietary and can be maintained not only against the wrongdoing trustee but also against anyone who derives title from him other than a bona fide purchaser for value without notice of the breach of trust. It matters not how many successive transactions there may have been, so long as tracing is possible and no bona fide purchaser is involved, his proprietary claim is almost unfettered. Comparison with personal liability to account

Proprietary remedies cannot be fully understood without the appreciation of the doctrine of unjust enrichment. The general principle is that where the defendant is unjustly enriched at the claimant's expense, the defendant must make restitution. The law of unjust enrichment is distinguished from the other principal heads of civil obligation in that its focus is on stripping the defendant of gains made rather than making good losses suffered by the plaintiff. Where the claimant has a right to proceed against a particular asset in the defendant's hands, it amounts to a proprietary claim.

A proprietary tracing claim involves the claimant in identifying his property in the hands of the defendant. The defendant must not only receive but retain the trust property. Hence, if the defendant no longer has the trust property, a proprietary tracing claim is not available. A proprietary remedy amounts to an assertion to a right over trust property. It could be brought against a trustee or a third party who has come into possession of trust property. The remedy is proprietary and wide-ranging because it attaches to the property and the liability of the third party will depend on his possession of that property.

Only when the third party is no longer in possession of trust property or where the trust property is no longer identifiable so that a tracing claim is lost, will personal remedies be considered and the third party or trustee will be liable in his own right for breach of trust.

Personal liability to account is liability to pay an amount of monetary compensation equal to the loss suffered by the trust as a result of the breach. This extends beyond the trustees themselves to dishonest assistants of the breach and also to knowing recipients of trust property. The crucial point to grasp is that this is a purely personal claim such that if any of the actors go into insolvency or bankruptcy; this remedy is practically useless because the claimant-beneficiary would have no proprietary rights.

By contrast, the tracing rules and principles relate to establishing a proprietary claim to specific property. If that trust property is particularly unique and valuable such as rare, antic paintings or one that is likely to appreciate in value, the establishment of a proprietary claim will enable the claimant to claim entitlement to any profits derived from that trust property in addition to claiming it back in specie.

In conclusion, a proprietary claim will also entitle the claimant to recover compound interest on the property recovered. Hence, a proprietary claim is usually the most sought-after remedy and is the most valuable among the two. Of course, in practice both claims will be pursued simultaneously by the beneficiaries. This, is in truth a search for a solvent defendant that is anyone who will be able to make good the claimant's loss.