Are the distinctions between legal and equitable proprietary claims appropriate?
Discuss.
Answer Plan
Answer
A proprietary claim in law or in equity is available to the beneficiary or defendant and involves a right to 'follow' or ‘trace’ the trust assets in the hands of the trustees or third parties. The claim in equity does not subsist against the bona fide transferees of the legal estate for value without notice. The remedy is ‘proprietary’ in the sense that the order is attached to specific property under the control of another or may take the form of a charging order thereby treating the claimant as a secured creditor. This is known as a claim in rem or a ‘tracing order’.
‘Following’ the assets in the hands of the defendant involves the process of identifying the same asset (but not in any substituted form, such as the proceeds of sale of the asset) as it moves from hand to hand with the effect that the claimant may attach an order on the property. On the other hand, a tracing order is a process whereby the claimant establishes and protects his title to assets in the hands of another, see Lord Millett in Foskett v McKeown [2001] 1 AC. The remedies at common law and equity are mainly ‘personal’, in the sense that they are remedies that force the defendant to do or refrain from doing something in order to compensate the claimant for the wrong suffered. But the proprietary remedy exists as a right to proceed against a particular asset in the hands of the defendant.
The proprietary remedy has a number of advantages over the personal remedy, namely:
A person who asserts a proprietary claim at law uses the action that is appropriate to the type of property that he claims. Thus, if he is claiming land, he will use the action for the recovery of land. He needs to show better title than the defendant and his claim is not defeated by a bona fide purchaser of the legal estate for value without notice. If the claim is for specific chattels, he will use the tortuous action for conversion under the Torts (Interference with Goods) Act 1977. This Act gives the court a discretion whether to order the specific recovery of the goods. If the claim is in respect of a chose in action, the claimant will use the action for money had and received. The legal proprietary claims will now be subject to the defence of bona fide change of position.
The common law restitutionary claim is much more restricted than the claim in equity. The approach at law is that provided that the claimant’s property is ‘identifiable’, the process of tracing may continue through any number of transformations. The form that the property takes is irrelevant, provided that the claimant shows a direct connection between his property in its original form and the property in its altered form in the hands of the defendant, see Taylor v Plumer (1815) 3 M&S 562 and Lipkin Gorman v Karpnale [1991] 3 WLR 10.
The main restriction in the common-law right to trace is that the property ceases to be ‘identifiable’ when it becomes comprised in a mixed fund or when the asset ceases to be wholly owned by the claimant, see AGIP v Jackson [1991] Ch 547. Such restrictions on legal proprietary claims are highly inconvenient, but the difficulties have been substantially alleviated by the intervention in equity.
Equity developed a more realistic approach to tracing as opposed to the common law. Equity had conceived the notion that once property was identifiable, recognition of the claimant’s right could be given by attaching the order:
• to specific property; or
• by charging the asset for the amount of the claim.
The consequences of a successful equitable proprietary claim are that the defendant will be treated as a trustee of the property in question for the claimant. The trust is often said to be a constructive trust. Alternatively, the claimant may be subrogated to the rights that a third party has against the defendant (see Boscawen v Bajwa [1996] 1 WLR 328).
The pre-requisites for a successful equitable proprietary claim were originally laid down in Re Diplock [1948] Ch 465. These are as follows:
Recently, in Lipkin Gorman (a firm) v Karpnale [1991] 3 WLR 10, Lord Goff advocated a defence of bona fide change of position, which ought to be adopted in English law in respect of restitutionary claims. This defence will be developed on a case-by-case basis. The usual approach adopted by the courts was based on estoppel, which has limitations that make it unsuitable to restitutionary claims. The estoppel is based upon a representation by the claimant, whether express or implied, that the defendant is entitled to treat the money as his own. The mere payment of money under a mistake cannot, by itself, constitute a representation which will estop the payer from asserting his right to receive his payment. Further the defence of estoppel stands or falls in its entirety. The defence may not be adjusted to suit the circumstances of the case.
The defence of change of position would be available to an innocent volunteer who, after receiving the claimant’s money, has altered his position to such an extent that, having regard to all the circumstances, it would be inequitable to require him to make full restitution to the claimant, see Abou-Ramah v Abacha [2006] All ER (D) 80. On the other hand, the defence ought not to be available to a defendant who has changed his position in bad faith, that is, a defendant who spends the claimant’s money after knowledge of facts entitling the claimant to restitution. Likewise, in Cressman v Coys of Kensington [2004] EWCA 47, the Court of Appeal decided that the defence was not available to the defendant who acquired a personalised, cherished number plate by mistake and consciously disposed of it in order to avoid the claimant’s action. Similarly, the defence will not be available to a wrongdoer. In any event, the defendant is required to establish that there is a causal link between the mistaken receipt of the overpayment and the recipient's change of position, which makes it inequitable for the recipient to be required to make restitution, see Scottish Equitable plc v Derby [2001] 3 All ER 818. The mere fact that the defendant has spent the money in whole or in part, in the ordinary course of things, does not, of itself, render it inequitable that he should be called upon to repay the claimant. But if the defendant has spent the claimant’s money on a venture that would not have been undertaken but for the gift, such conduct would be capable of being construed as a change of position.
In Credit Suisse (Monaco) SA v Attar [2004] EWHC 374, the court decided that dishonesty on the part of the defendant would deprive him of the defence of change of position. Likewise, the repayment of a debt which was required to be repaid sooner or later would not afford a defence to the defendant, for in such a case there is no causal connection between the mistaken receipt and the expenditure.
Wilful blindness with regard to a windfall amount received by the defendant followed by a payment out of his account will be insufficient to support the defence, see Fea v Roberts [2005] All ER (D) 69.
The right to trace is extinguished if the claimant’s property is no longer identifiable, eg the trust monies have been spent on a dinner or a cruise or in paying off a loan. The remedy presupposes the continued existence of the claimant’s property as a separate fund or as part of a mixed fund.
It is essential that the claimant proves that the property was held by another on his behalf in a fiduciary or quasi-fiduciary capacity in order to attract the jurisdiction of equity. This fiduciary need not be the person who mixes the funds or the assets. The mixture may be effected by an innocent volunteer, as in Re Diplock (1948). This requirement of a fiduciary relationship was stretched to breaking point in Chase Manhattan Bank v Israel – British Bank [1979] 3 All ER 1025, where Goulding J decided that an overpayment to a recipient bank made the latter a fiduciary on the date of receipt of the funds. However in Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669, the House of Lords reviewed this case and decided that the fiduciary relationship arose when the recipient bank became aware of the overpayment and retained the funds. Further the requirement of a fiduciary relationship has been questioned by the House of Lords in Foskett v McKeown. Despite the view of the High Court in Bracken Partners Gutteridge [2003] EWHC 1064, to the effect that the requirement has been abolished, the better view is that it still remains as part of the law.
The repercussions of the fiduciary relationship requirement may have important consequences in commercial law with regard to reservation of title clauses, see Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339. Further, in the Westdeutsche case it was said that stolen money may be traceable in equity on the ground that property obtained by fraud is subject to a constructive trust imposed on the fraudulent party. The court in Shalson v Russo [2003] EWHC 1637, questioned this principle on the ground that the thief acquires no title to property and it is difficult to see how he can be a trustee of the property. The true owner retains the legal and equitable interests.
Where the trustee or fiduciary mixes his funds with that of the beneficiary or has purchased further property with the mixed fund, the beneficiary loses his right to elect to take the property acquired. The reason is that the property would not have been bought with the beneficiary’s money pure and simple but with the mixed fund. However, in the exercise of the exclusive jurisdiction of equity, the beneficiary would be entitled to have the property charged for the amount of the trust money (see Re Oatway [1903] 2 Ch 356).
Further, the rule in Clayton’s case (Devaynes v Noble (1816 1 Mer 529)) is to the effect that where a trustee mixes trust funds subsisting in an active current bank account belonging to two beneficiaries, the amount of the balance in the account is determined by attributing withdrawals in the order of sums paid in to the account (‘first in, first out’ (FIFO)).
The rule is applied as between beneficiaries (or innocent parties) inter se in order to ascertain:
(a) ownership of the balance of the fund; and
(b) ownership of specific items bought from funds withdrawn from the account.
The basis of the rule lies in the fact that as between the beneficiaries (or innocent parties) the ‘equities are equal’, that is, there is no need to give one beneficiary any special treatment over the other. However, the modern tendency is to distinguish Clayton in the interests of fairness and justice (see Barlow Clowes v Vaughan [1992] 4 All ER 22 and Commerzbank Aktiengesellschaft v IMB v Morgan [2004] EWHC 2771).
Note
This is a general question requiring you to evaluate the distinctions between the two types of claims.