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(iii) Tracing into Substitute Assets

A matter of particular controversy as regards the application of the tracing rules concerns how a right in one piece of property can be asserted against a substitute asset. In particular, does this right in the substitute property arise automatically or as a result of the exercise of a power by the claimant? The law on this point is confused. There is authority which suggests that the claimant obtains an immediate interest in the substitute asset,[1] and Lord Millett in Foskett v McKeown adopted such an approach.[2] Alternatively, there is authority that suggests that the claimant has only a power to crystallize his or her proprietary interest in the substitute asset. This power analysis was recognized by Lord Goff as regards Common Law proprietary claims.[3] Foskett v McKeown itself provides some support for this power analysis. Lord Millett did recognize that the claimant has a power,[4] but this relates to the choice to pursue a claim either against the original asset or its substitute, as long as both can still be identified. The preferable view is that once the original asset cannot be identified, the equitable interest relating to that asset is extinguished and is automatically replaced by a proprietary interest in the substitute. Where, however, the original asset and the substitute can both be identified, the claimant can elect either to claim the original asset or its substitute.[5] If the claimant chooses to claim the substitute, this will extinguish the proprietary interest in the original asset and transfer it to the substitute, unless that substitute has been obtained by a bona fide purchaser for value.

This election analysis has a number of advantages. In particular, it explains why the claimant cannot bring proprietary claims against both the original property and the substituted property. By assuming that the claimant has a power to shift the proprietary interest from the original property to its substitute and that this can occur only once the power of election has been exercised, it follows that the claimant is able to bring only one proprietary claim at a time. But this election analysis does cause problems of its own.[6] For example, if the effect of this analysis is that the claimant has no interest in the substitute until the power of election has been exercised, it should follow that, if the defendant who is in possession of the substitute becomes insolvent before the claimant has made the election, the claimant’s right to the substitute ought to be extinguished.[7]

  • [1] Cave v Cave (1880) 15 Ch D 639 (Fry J). See also Re Diplock’s Estate [1948] Ch 465; Smith, The Law ofTracing, 356-61.
  • [2] Foskett v McKeown [2001] 1 AC 102, 134.
  • [3] Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 573. See also Re French’s Estate (1887) 21 LR
  • [4] Ir 283. 375 Foskett v McKeown [2001] 1 AC 102, 127.
  • [5] See Boscawen v Bajwa [1996] 1 WLR 328, 342 (Millett LJ).
  • [6] See S Khurshid and M Matthews, ‘Tracing Confusion’ (1979) 95 LQR 78, and N Andrews and J Beatson,‘Common Law Tracing: Springboard or Swan-Song?’ (1997) 113 LQR 21, 24.
  • [7] Grantham, ‘Doctrinal Bases for the Recognition of Proprietary Rights’, 570.
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