(i) The Fiduciary Requirement
The orthodox requirement for tracing in Equity is that it is necessary to show that the property in which the claimant had an equitable proprietary interest passed to the defendant through the hands of a fiduciary in breach of duty.[1] In other words, there must have been an unauthorized disposition of property.[2] It is not, however, necessary to show that the defendant owed fiduciary duties to the claimant, since it suffices that the fiduciary through whose hands the property passed was an intermediary between the claimant and the defendant.[3] This is illustrated by Re Diplock[4] in which the executors of Diplock’s will distributed ?203,000 amongst 139 different charities. The validity of the will was successfully challenged by the next of kin,[5] who then sought to recover the money that had been paid to the charities. It was held that their equitable proprietary claim succeeded, even though their money had been mixed in some cases with the money already held by the charities in bank accounts. It did not matter that there was no fiduciary relationship between the next of kin and the charities, because it was sufficient that there was a prior fiduciary relationship between the next of kin and the executors, who had transferred the estate in breach of fiduciary duty.
Although the condition for tracing in Equity that the property has passed through the prism of a fiduciary relationship has been recognized in many cases, it is controversial. The requirement has been expressly rejected in New Zealand.[6] In Agip (Africa) Ltd v Jackson [7] Millett J affirmed that, in England, a fiduciary relationship is required to permit the assistance of Equity to be invoked, but he accepted that this requirement has been widely condemned[8] and depended on authority rather than principle. He recognized that it was not necessary to show that the fund had been the subject of fiduciary obligations before it got into the wrong hands; it was sufficient that the transfer to the defendant had created the fiduciary relationship. This is significant to our understanding of what the fiduciary relationship is being required to do. This can also be identified from Re Diplock itself, in which the actual requirement for tracing in Equity was that there was ‘a fiduciary or quasi-fiduciary relationship or of a continuing right of property recognised in Equity’.[9] The key requirement for tracing in Equity today should consequently be that the claimant has a ‘right of property recognised in equity’, which is either a continuing right or one that is created as a result of a breach of a fiduciary or some other duty.421 Rather than focusing on a fiduciary relationship, the only condition for the equitable tracing rules to apply should be that the claimant can establish an equitable proprietary base.4 2 This approach was implicitly recognized in Campden Hill Ltd v Chakrani, in
which Hart J held that the fiduciary relationship can be established from the ‘division of the legal and beneficial ownership’ of the property,424 and, in Re Diplock itself, the Court recognized the principle that:425
equity may operate on the conscience not merely of those who acquire a legal title in breach of some trust, express or constructive, or of some other fiduciary obligation, but of volunteers provided that as a result of what has gone before some equitable proprietary interest has been created and attaches to the property in the hands of the volunteer.
This was actually highly significant on the facts of Re Diplock itself, because the next of kin, being the potential beneficiaries under a will, had no initial equitable interest in the undistributed property.426 The only way in which such an equitable proprietary interest could be created was by treating the executors as owing a fiduciary duty to the next of kin that they had breached by mistakenly transferring the estate to the charities. As a result of this breach of fiduciary duty, the charities should be treated as holding the money on constructive trust for the next of kin, because the property should have been transferred to them. The Court of Appeal in Re Diplock’s Estate did not consider this aspect of the decision, but the creation of an equitable proprietary interest was clearly essential before the next of kin could trace in Equity and then bring an equitable proprietary claim.
- [1] Re Hattett’s Estate (1880) 13 Ch D 696, 710 (Jessel MR); Re Diplock’s Estate [1948] Ch 465; Agip (Africa)Ltdv Jackson [1991] Ch 547, 566 (Fox LJ); ElAjou v DollarLandHoldingsplc [1993] 3 All ER 717, 733 (MillettJ); Boscawen v Bajwa [1996] 1 WLR 328, 335 (Millett LJ); Bank of America v Arnell [1999] Lloyd’s Rep Bank399. Re Diplock’s Estate was specifically affirmed by Lord Browne-Wilkinson in Westdeutsche LandesbankGirozentrale v Islington LBC [1996] AC 669, 714.
- [2] Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR1072. If the disposition is authorized, the claimant’s proprietary interest will be overreached, so that theclaimant no longer has an equitable proprietary interest in the asset.
- [3] Re Diplock’s Estate [1948] Ch 465. See also Boscawen v Bajwa [1996] 1 WLR 328.
- [4] [1948] Ch 465.
- [5] Chichester Diocesan Fund and Board ofFinance Inc v Simpson [1944] AC 341.
- [6] Elders Pastoral Ltd v Bank ofNew Zealand [1989] 2 NZLR 180.
- [7] [1990] Ch 265, 290.
- [8] Including subsequently by himself: P Millett, ‘Tracing the Proceeds of Fraud’ (1991) 107 LQR 71.
- [9] ReDiplock [1948] Ch 465, 520.
