(iii) Tracing into Mixed Products
The major limitation on the efficacy of tracing at Law is that it is not possible to trace into a mixed product,[1] save where it is possible to separate the components of the product. There are two reasons why tracing into a mixed fund at Law is not possible: first, because of the inadequacies of legal proprietary remedies, especially that it is not possible to create a security interest over a mixed fund at Law by means of charging the fund for the amount due.[2] [3] Secondly, because the Law adopts a rigidly logical approach to tracing. Where there has been an irretrievable mixing it is simply not possible to say in what property the claimant has a proprietary interest. Consequently, where such mixing has occurred, the claimant’s legal title to the property will be extinguished.
The key implication of this restriction on tracing at Law arises where the claimant’s money becomes mixed in the defendant’s bank account, so that it is not possible to say which money belongs to the claimant and which to the defendant. It has sometimes been suggested that the effect of the restriction on Common Law tracing into mixed products is that, if the claimant’s money is paid into a bank account, tracing will automatically fail. But this is not the case. The Common Law is willing to trace into a bank account, even though the property in which the claimant has a proprietary interest has changed its identity from a sum of money to a debt owed by the bank to the account holder. But, since this debt represents completely the sum of money which originally existed, assuming that no other money had been credited to this account either before or after the claimant’s money had been credited to it, the debt can simply be regarded as the substitute for the claimant’s money. A good example of tracing in such circumstances is Banque Beige Pour L’Etranger v Hambrouck404 where the first defendant forged a number of cheques so that ?6,000 was debited from the account of his employer at the claimant bank and this sum was credited to his own bank account. The first defendant then drew sums from this account which he paid to his mistress and she paid these sums into her own bank account. The claimant bank sought to recover this money from the mistress. At the time of the bank’s action the mistress’s account was credited with ?315. The Court ofAppeal held that the claimant was able to trace into this credit because only the proceeds of the fraud had been paid into the account of the first defendant and his mistress, so that there had not been any mixing of money. It did not matter that the tracing process did not relate to sums of money throughout, since at various stages credits were substituted for actual money. This did not matter because the credits simply represented the money and neither the credits nor the money were ever tainted by any other money or credits which did not derive from the fraud.
Modern banking practice is such that it is increasingly difficult to trace into and through a bank account. This is especially because of electronic transfers, which mean that the claimant is unable to show that the money received by the defendant necessarily represents the claimant’s money. This limitation on the efficacy of tracing at Law was recognized in Trustee of the Property of FC Jones v Jones,405 in which Millett LJ affirmed that it was not possible to trace through inter-bank clearing and that tracing at Law would be defeated where value is passed by an electronic funds transfer. The practical significance of this is illustrated by Agip (Africa) Ltd v Jackson,[4] where the claimant bank had been defrauded of substantial sums of money by its chief accountant. The case focused on a payment to a company that had a bank account in London. Before the payment was made, the company had nothing credited to this account. Once the payment had been made, the balance was transferred to the defendant firm of accountants, and then to another company, and finally overseas to the fraudsters. The claimant sought to recover the value of the money received by the defendant. It succeeded in Equity, but failed at Law because of mixing, since there had been a telegraphic transfer of the money between accounts, so nothing passed except for a stream of electrons.
The inability of the Common Law to trace through a mixed fund explains why tracing in Equity has proved so much more significant in practice, since Equity will trace through mixed funds. But, for the equitable tracing rules to be engaged, the claimant must first establish an equitable proprietary base; it is not yet possible to rely on the equitable tracing rules where the claimant has only a legal proprietary base. There are some signs, however, of greater flexibility being introduced into the Common Law tracing rules, albeit in jurisdictions other than England. For example, in BMP Global Distribution Inc v Bank of Nova Scotia,[5] [6] the Supreme Court of Canada recognized that the transfer of money through the clearing system does not constitute a systematic break in the chain of possession of the funds, so that it would be possible to trace at Law into a mixed bank account if it is possible to identify the funds.4 8 This cannot yet be regarded as representing English law, but it does provide further evidence for the gradual breakdown of the long-standing distinction between the tracing rules at Law and in Equity.
- [1] Taylor v Plumer (1815)3 M and S 562,105 ER 721; Agip (Africa) Ltd v Jackson [1991] Ch 547; ElAjou vDollar Land Holdings [1993] 3 All ER 717. LD Smith, ‘Tracing in Taylor v. Plumer. Equity in the Court ofKing’s Bench’ [1995] LMCLQ 240 has argued that Taylor v Plumer actually turned on tracing in Equity. Thiswas recognized by Millett LJ in Trustee of the Property of FC Jones v Jones [1997] Ch 159, 169 but he stillaffirmed the rule that tracing at Law is barred if the property has been mixed with other property.
- [2] Agip (Africa) Ltd v Jackson [1991] Ch 547, 563 (Fox LJ).
- [3] [1921] 1 KB 321. 405 [1997] Ch 159, 168.
- [4] [1990] Ch 265, affirmed by the Court of Appeal: [1991] Ch 547. 407 [2009] SCC 15.
- [5] 408 This was considered to be consistent with Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321
- [6] and Agip (Africa) Ltd v Jackson [1991] Ch 547, although the latter case was specifically concerned with tracingin equity.
