Chapter 10 Part 1: Tracing & 3rd Party Liability

10.1. Introduction

You can use this workbook in a number of ways - but the main idea is that each section takes you through a series of questions. Some questions clearly have a right and wrong answer, and you might think these are rather trivial. On the other hand, even these questions sometimes require quite detailed knowledge. I use questions like this to ensure that students have covered the ground prior to tutorials. That is all such questions can do - they cannot test understanding. Nevertheless, it is obviously important that you have covered the main ground of the area. But if this is not your first time through the workbook, and you are already familiar with the material, you may prefer to skip this type of question. The most interesting legal questions, of course, do not have clear yes/no answers, but generally I have a preferred view which I express (with which of course you may well disagree).

The workbook should take about an hour if you just try the questions, or if you are using the workbook for revision purposes. With both types of question, you can always skip back to the immediate or main contents page, if you want.

On the other hand, if you are in the mood to browse, you can also cross-link into the reference material if you want further particulars on any question, or my answer to it. There is quite a bit of reference material, connected by hypertext links, and if you give the questions the thought that I hope they deserve, and browse through the reference material, I would set aside considerably more than an hour.

You can always take shortcuts if you prefer, though, by going back to the immediate contents page, or indeed the main contents page.

Finally, there is a separate reference section, accessed via the main contents page. This contains references to the main cases, legislation and articles in the area, with links to further details where the workbook contains them, and additional links, as appropriate, to the resource book. There is also a bibliography. The reference section is structured in hypertext format, which is great for browsing, but probably not all that testing.

The next page is a question on classification, because there is more than one way to break up the law of trusts into smaller categories, with advantages for each method.

It would be difficult to justify the categorisation on conceptual grounds, since the workbook covers areas which are conceptually quite disparate. Tracing at common law can be a method of identifying property, enabling the plaintiff to take against the defendant whatever common law action is appropriate to protect his common law property rights. This depends on the property remaining identifiable at common law. Note that tracing in this sense is not a cause of action or a remedy in itself, but merely a means of identifying property: see, e.g., the first part of the passage set out from Millett J's judgment in Agip (Africa), referred to with approval by Tuckey J. in Bank Tejarat v. Hong Kong and Shanghai Banking Corporation [1995] 1 Lloyd's Rep 239, 245.

However, the term tracing at common law is also used, especially in some of the more recent cases, to describe a money had and received claim, which is a form of personal liability, and complete on receipt: see, e.g., Agip (Africa) Ltd v Jackson [1991] Ch. 547, where the term is used in this way. It is necessary, however, to establish receipt by the defendant of the plaintiff's property, which is why tracing may be necessary.

Equitable tracing can also a method of identifying property, the equitable title being enforceable against anybody except a bona fide purchaser for value without notice. An equitable tracing claim will be defeated by the destruction of the property, or its loss of identity using the applicable equitable rules. However, if property can be traced in equity into the hands of a knowing receiver, the knowing receiver becomes a constructive trustee of the property, and retains that liability whatever happens subsequently to the property.

However, the term equitable tracing is also used to describe the personal action in Re Diplock, which is complete upon receipt, and is not a proprietary claim at all.

Knowing receipt and knowing assistance are forms of personal liability. A knowing receiver is a constructive trustee, and remains liable even if he or she parts with the property. A knowing assister need not be a constructive trustee, since he or she need never obtain legal title to the trust property, but the liability of a knowing receiver is similar to that of a constructive trustee.

This workbook therefore contains a concoction of personal and proprietary actions, and common law and equitable claims, and has no particular conceptual coherence.

The next page takes you to a functional justification for the categorisation.

Common law tracing is a means of identifying property, either for a proprietary claim, or to establish that the defendant received the plaintiff's property for a personal claim. Equitable tracing is a remedy; liability for knowing receipt is definitely based, and liability for knowing assistance possibly based, on constructive trusteeship. There could be good reasons for treating them entirely separately, therefore, especially for example, if it was intended to develop a general theory of when constructive trusts might be imposed.

However, there are sound functional reasons for lumping together in this workbook what may well be very disparate concepts, in that the fact situations which can give rise to a tracing claim can also often give rise to a claim for knowing receipt or knowing assistance. An excellent (but by no means the only) example is Agip (Africa) Ltd v Jackson [1991] Ch 547, which is an important authority on common law and equitable tracing, and knowing receipt and knowing assistance. It might also be necessary to trace in equity, in order to establish receipt for a knowing receipt action, as in El Ajou v Dollar Land Holdings plc (No. 2) [1995] 2 All ER 213. For ease of explanation, therefore, I have decided to deal with the concepts in the same workbook, although I would accept that this might annoy conceptual purists.


Passages from Millett J.'s judgment in Agip (Africa), on common law tracing

Tracing at common law, unlike its counter-part in equity, is neither a cause of action nor a remedy, but serves an evidential purpose. The cause of action is for money had and received. Tracing at common law enables the defendant to be identified as the recipient of the plaintiff's money and the measure of his liability to be determined by the amount of the plaintiff's money he is shown to have received. The common law has always been able to follow a physical asset from one recipient to another. Its ability to follow an asset in the same hands into a changed form was established in Taylor v Plumer. In following the plaintiff's money into an asset purchased exclusively with it, no distinction is drawn between a chose in action such as the debt of a bank to its customer and any other asset: Re Diplock [1948] Ch 466, 519. But it can only follow a physical asset, such as a cheque or its proceeds, from one person to another. It can follow money but not a chose in action. Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee, provided that it does not cease to be identifiable by being mixed with other money in the bank account derived from some other source: Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321. Applying these principles, the plaintiffs claim to follow their money through Baker Oil's account where it was not mixed with any other money and into Jackson & Co's account at Lloyds Bank.

The defendants deny this. They contend that tracing is not possible at common law because the money was mixed, first when it was handled in new York, and secondly in Jackson & Co's own account at Lloyds Bank.

The latter objection is easily disposed of. The cause of action for money had and received is complete when the plaintiff's money is received by the defendant. It does not depend on the continued retention of the money by the defendant. Save in strictly limited circumstances it is no defence that he has parted with it. A fortiori it can be no defence for him to show that he has so mixed it with his own money that he cannot tell whether he still has it or not. Mixing by the defendant himself must, therefore, be distinguished from mixing by a prior recipient. The former is irrelevant, but the latter will destroy the claim, for it will prevent proof that the money received by the defendant was the money paid by the plaintiff.

In my judgment, however, the former objection is insuperable. The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. It remained throughout in the possession of the Banque du Sud. No copy was sent to Lloyds Bank or Baker Oil or presented to the Banque du Sud in exchange for the money. It was normally the plaintiffs' practice to forward a copy of the payment order to the supplier, when paying an invoice but this was for information only. It did not authorise or enable the supplier to obtain payment. There is no evidence that this practice was followed in the case of forged payment orders and it is exceedingly unlikely that it was.

Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money. The Banque du Sud merely telexed a request to Lloyds Bank to make a payment to Baker Oil against its own undertaking to reimburse Lloyds Bank in New York. Lloyds Bank complied with the request by paying Baker Oil with its own money. It thereby took a delivery risk. In due course it was no doubt reimbursed, but it is not possible to identify the source of the money with which it was reimbursed without attempting to follow the money through the New York clearing system. Unless Lloyds Bank's correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of Citibank and Lloyds Bank's correspondent bank with the Federal Reserve bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud. There is no evidence that Lloyds Bank's correspondent bank in New York was Citibank, and accordingly the plaintiffs' attempt to trace the money at common law must fail.

Passage from Fox LJ's judgment in Agip (Africa) on common law tracing:

Now, in the present case, the course of events was as follows. (1) The original payment order was in December signed by an authorised signatory. (2) The name of the payee was then altered to Baker Oil. (3) The altered order was then taken to Banque du Sud who complied with it by debiting the account of Agip with $518,822.92 and then instructing Lloyds Bank to pay Baker Oil. Banque du Sud also instructed Citibank in New York to debit its account with Citibank and credit Lloyds Bank with the amount of the order. (4) Lloyds Bank credited the money to Baker Oil's account on the morning of 7 January. (5) On 8 January, Lloyds Bank in pursuance of instructions from Baker Oil transferred the $518,822.92, which was the only sum standing to the credit of Baker Oil's account, to an account in the name of Jackson & Co. (6) Immediately before the transfer from Baker Oil, Jackson & Co's account was $7,911.80 in credit. In consequence of the transfer it became $526,734.72 in credit.

The inquiry which has to be made is whether the money paid to Jackson & Co's account `was the product of, or substitute for, the original thing.' In answering that question I do not think that it matters that the order was not a cheque. It was a direction by the account holder to the bank.

When Atkin LJ referred in the Banque Belge case to the `original money' he was, I assume, referring to the money credited by Banque Belge (the plaintiff) to Hambrouck's account. Money from that account was the only money in Mlle Spanoghe's deposit account. It was not, therefore, difficult to say that the money in issue (i.e., the residue of Mlle Spanoghe's account) could be identified as the product of the original money. There were no complexities of tracing at all. Everything in Mlle Spanoghe's account came from Hambrouck's account and everything in Hambrouck's account came from the credit in respect of the fraudulent cheque.

The position in the present case is much more difficult. Banque du Sud can be regarded as having paid with Agip's money but Lloyds Bank, acting as directed by Banque du Sud, paid Baker Oil with its own money. It had no other and, accordingly, took a delivery risk. It was, in the end, put in funds, but it is difficult to see how the origin of those funds can be identified without tracing the money through the New York clearing system.

The money in the present case did get mixed on two occasions. The first was in the New York clearing system and the second was in Jackson & Co's own account. The judge held that the latter was of no consequence. I agree. The common law remedy attached to the recipient of the money and its subsequent transposition does not alter his liability. The problem arises at an earlier stage. What did Jackson & Co receive which was the product of Agip's asset?

Baker Oil was controlled for present purposes by Jackson & Co but Baker Oil was paid by Lloyds Bank which had not been put in funds from New York. It was subsequently recouped. But it is not possible to show the source from which it was recouped without tracing the money through the New York clearing system. The judge said [1990] Ch 265, 286:

"Unless Lloyds Bank's correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of the Citibank and Lloyds Bank's correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud."

I respectfully agree with that view. Accordingly, it seems to me that the common law remedy is not available.

I should add this. Atkin LJ's approach in the Banque Belge case amounts virtually to saying that there is now no difference between the common law and equitable remedies. Indeed, the common law remedy might be wider because of the absence of any requirement of a fiduciary relationship. There may be a good deal to be said for that view but it goes well beyond any other case and well beyond the views of Bankes and Scrutton LJJ. And in the 70 years since the Banque Belge decision it has not been applied. Whether, short of the House of Lords, it is now open to the courts to adopt it I need not consider. I would in any event feel difficulty in doing so in the present case where, as I indicate later, it seems to me that the established equitable rules provide an adequate remedy.

Notes on Agip (Africa) - common law tracing

Millett J. makes clear that the claim for money had and received does not depend on the continued retention of the money by the defendant.

Millett J. also distinguished between a payment order and a cheque, commenting (at p. 399) that the payment order never moved from Tunisia, and that nothing passed between Tunisia and London but a stream of electrons, so that it was not possible to treat the money received by Lloyds as representing the proceeds of the payment order or of any other physical asset (e.g., a cheque) previously in its hands and delivered by it in exchange for the money.

This distinction seems in principle difficult to justify, since a cheque no more represents the money itself than do the stream of electrons; its possession merely confers contractual rights against the issuing bank, but there is no doubt that Lloyds had a contractual claim against the Banque du Sud at the latest when they had received and acted upon the telexed payment order. However, it is in line with Millett’s view in (1991) 107 L.Q.R. 71, 73, that the common law will only follow tangible property from one person to another.

Millett J.'s reasoning was applied by Tuckey J. in Bank Tejarat v. Hong Kong and Shanghai Banking Corporation (Ci) Ltd. and Hong Kong and Shanghai Bank Trustee (Jersey) Ltd. [1995] 1 Lloyd's Rep. 239 (above). As in Agip (Africa), the money was paid by telegraphic transfer, through clearing banks, and for the same reason, a common law tracing claim failed. Bank Tejarat also failed to argue that, since (as is common in documentary credit transactions) they had paid against presentation of a draft (i.e., a bill of exchange), that operated similarly to a cheque. The draft was not, being used, as a cheque would be, as the method of making the payment. Its presentation to the plaintiff bank was merely the trigger for payment, so the analogy with the cheque failed. Tuckey J observed that:

"The simple answer to this submission is that the drafts were not the means by which Tejarat paid their money to CAK. The payment out of Tejarat's account ... was probably made by telex instructions ... (a stream of electrons). It was certainly not made by the drafts, so there is nothing from which Tejarat can trace."

Electrons are particles and themselves (presumably) physical objects, but there is no way in which any particular electron, or group of electrons, can be associated with any particular property of the plaintiff.

Fox L.J. did not (at p. 465h) adopt that distinction, relying instead upon the fact that Lloyds had credited the money to Baker Oil before it was reimbursed with the plaintiff's money. Note that under this form of payment it is more usual for the second bank to wait until payment has been received before crediting its customer's account. This, however, would seem to be merely an additional reason why the money could not be traced through the New York banks. It does not explain why Agip could not follow the causes of action, and it is necessary to adopt Millett J's distinction to do that.

Fox L.J.'s views of Atkin L.J.'s views in Banque Belge, that the common law, like equity, can follow money through mixed accounts, are at best neutral, and at worst disapproving.

Passage from Millett J's judgment (whose decision was upheld by the Court of Appeal) in Agip (Africa) on the equitable tracing claim.

There is no difficulty in tracing the plaintiffs' property in equity, which can follow the money as it passed through the accounts of the correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.

The only restriction on the ability of equity to follow assets is the requirement that there must be some fiduciary relationship which permits the assistance of equity to be invoked. The requirement has been widely condemned and depends on authority rather than principle, but the law was settled by Re Diplock [1948] Ch 466. It may need to be reconsidered but not, I venture to think, at first instance. The requirement may be circumvented since it is not necessary that the fund to be traced should have been the subject of fiduciary obligations before it got into the wrong hands; it is sufficient that the payment to the defendant itself gives rise to a fiduciary relationship: Chase Manhattan Bank N.A. v Israel-British Bank (London) Ltd [1981] Ch 105.

The requirement is, however, readily satisfied in most cases of commercial fraud, since the embezzlement of a company's funds almost inevitably involves a breach of fiduciary duty on the part of one of the company's employees or agents. That was so in present case. There was clearly a fiduciary relationship between Mr Zdiri and the plaintiffs. Mr Zdiri [the chief accountant] was not a director nor a signatory on the plaintiffs' bank account, but he was a senior and responsible officer. As such he was entrusted with possession of the signed payment orders to have them taken to the bank and implemented. He took advantage of his possession of them to divert the money and cause the separation between its legal ownership which passed to the payees and its beneficial ownership which remained in the plaintiffs. There is clear authority that there is a receipt of trust property when a company's funds are misapplied by a director and, in my judgment, this is equally the case when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them. ...

The tracing claim in equity gives rise to a proprietary remedy which depends on the continued existence of the trust property in the hands of the defendant. Unless he is a bona fide purchaser for value without notice, he must restore the trust property to its rightful owner if he still has it. But even a volunteer who has received trust property cannot be made subject to a personal liability to account for it as a constructive trustee if he has parted with it without having previously acquired some knowledge of the existence of the trust: Re Montagu's Settlement Trusts [1987] Ch 264.

The plaintiffs are entitled to the money in court which rightfully belongs to them. To recover the money which the defendants have paid away the plaintiffs must subject them to a personal liability to account as constructive trustees and prove the requisite degree of knowledge to establish the liability.


Passage from Fox LJ's judgment in Agip (Africa) on the equitable tracing claim:

Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is, however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being. There is no difficulty about that in the present case since Mr Zdiri must have been in a fiduciary relationship with Agip. He was the chief accountant of Agip and was entrusted with the signed drafts or orders upon Banque du Sud.

Notes on the (successful) equitable tracing claim in Agip (Africa):

In addition to their claim at common law (which failed), the plaintiffs also claimed (successfully) that they were entitled to trace in equity. Since the only reason they failed at common law was because they could not establish that what Baker Oil had received was their money, this clearly suggests that it is easier to establish that the defendant has received the plaintiff's property in equity than it is at common law.

Because (unlike the action for money had and received) tracing in equity is a proprietary claim, it depends on retention of the money by the defendant (see the distinction between personal and proprietary claims). Baker Oil had retained only about US $ 45,000, and only this amount could be traced in equity, but the plaintiffs also succeeded in respect of the amount dissipated by Baker Oil, on the basis of knowing assistance (see notes on knowing assistance).


Passage from Millett J's judgment (whose decision was upheld by the Court of Appeal) in Agip (Africa) on the equitable tracing claim.

There is no difficulty in tracing the plaintiffs' property in equity, which can follow the money as it passed through the accounts of the correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.

The only restriction on the ability of equity to follow assets is the requirement that there must be some fiduciary relationship which permits the assistance of equity to be invoked. The requirement has been widely condemned and depends on authority rather than principle, but the law was settled by Re Diplock [1948] Ch 466. It may need to be reconsidered but not, I venture to think, at first instance. The requirement may be circumvented since it is not necessary that the fund to be traced should have been the subject of fiduciary obligations before it got into the wrong hands; it is sufficient that the payment to the defendant itself gives rise to a fiduciary relationship: Chase Manhattan Bank N.A. v Israel-British Bank (London) Ltd [1981] Ch 105.

The requirement is, however, readily satisfied in most cases of commercial fraud, since the embezzlement of a company's funds almost inevitably involves a breach of fiduciary duty on the part of one of the company's employees or agents. That was so in present case. There was clearly a fiduciary relationship between Mr Zdiri and the plaintiffs. Mr Zdiri [the chief accountant] was not a director nor a signatory on the plaintiffs' bank account, but he was a senior and responsible officer. As such he was entrusted with possession of the signed payment orders to have them taken to the bank and implemented. He took advantage of his possession of them to divert the money and cause the separation between its legal ownership which passed to the payees and its beneficial ownership which remained in the plaintiffs. There is clear authority that there is a receipt of trust property when a company's funds are misapplied by a director and, in my judgment, this is equally the case when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them. ...

The tracing claim in equity gives rise to a proprietary remedy which depends on the continued existence of the trust property in the hands of the defendant. Unless he is a bona fide purchaser for value without notice, he must restore the trust property to its rightful owner if he still has it. But even a volunteer who has received trust property cannot be made subject to a personal liability to account for it as a constructive trustee if he has parted with it without having previously acquired some knowledge of the existence of the trust: Re Montagu's Settlement Trusts [1987] Ch 264.

The plaintiffs are entitled to the money in court which rightfully belongs to them. To recover the money which the defendants have paid away the plaintiffs must subject them to a personal liability to account as constructive trustees and prove the requisite degree of knowledge to establish the liability.

Millett J's views on knowing receipt (upheld in the CA)

In Baden, Delvaux and Lecuit v. Societe General pour Favoriser le Developpement du Commerce et de l'industrie en France S.A. [1983] BCLC 325, 403, Peter Gibson J. said:

[Millett J set out the knowledge requirements in that case, and continued]

I respectfully agree. In my judgment, much confusion has been caused by treating this as a single category and by failing to differentiate between a number of different situations. Without attempting an exhaustive classification, it is necessary to distinguish between two main classes of case under this heading.

The first is concerned with the person who receives for his own benefit trust property transferred to him in breach of trust. He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was breach of trust; or if he received it without such notice but subsequently discovered the facts. In either case he is liable to account for the property, in the first case as from the time he received the property, and in the second as from the time he acquired notice.

The second and, in my judgment, distinct class of case is that of the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust. He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to have known the exact terms of the trust. This class of case need not be considered further since the transfer to Baker Oil was not lawful.

In either class of case it is immaterial whether the breach of trust was fraudulent or not. The essential feature of the first class is that the recipient must have received the property for his own use and benefit. This is why neither the paying nor the collecting bank can normally be brought within it. In paying or collecting money for a customer the bank acts only as his agent. It is otherwise, however, if the collecting bank uses the money to reduce or discharge the customer's overdraft. In doing so it receives the money for its own benefit.

This is not a technical or fanciful requirement. It is essential if receipt-based liability is to be properly confined to those cases where the receipt is relevant to the loss. This can be demonstrated by considering the position of Mr. Bowers in the present case. He was a partner in Jackson & Co. but he played no active part in the movement of the funds. He did not deal with the money or give instructions in regard to it. He did not take it for his own benefit. He neither misapplied nor misappropriated it. It would not be just to hold him directly liable merely because Mr. Jackson and Mr. Griffin, who controlled the movement of the money from the moment it reached Baker Oil, chose on this occasion to pass it through his firm's bank account instead of through Euro-Arabian's account as previously.

Mr. Griffin did not receive the money at all, and Mr. Jackson and Mr. Bowers did not receive or apply it for their own use and benefit. In my judgment, none of them can be made liable to account as a constructive trustee on the basis of knowing receipt.

Extract from judgment of Millett J (whose judgment was upheld in the Court of Appeal) in Agip (Africa) - on knowing assistance:

A stranger to the trust will also be liable to account as a constructive trustee if he knowingly assists in the furtherance of a fraudulent and dishonest breach of trust. It is not necessary that the party sought to be made liable as a constructive trustee should have received any part of the trust property, but the breach of trust must have been fraudulent. The basis of the strangers liability is not receipt of trust property but participation in a fraud: Barnes v Addy (1874) 9 Ch App 244, and see the explanation of the distinction between the two categories of the case given by Jacobs P in DPC Estates Pty Ltd v Grey [1974] 1 NSWLR 443.

The authorities at first instance are in some disarray on the question whether constructive notice is sufficient to sustain liability under this head. In the Baden case [1983] BCLC 325, Peter Gibson J accepted a concession by counsel that constructive notice is sufficient and that on this point there is no distinction between cases of ‘knowing receipt' and ‘knowing assistance.' This question was not argued before me but I am unable to agree. In my view the concession was wrong and should not have been made. The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not. Tracing claims and cases of ‘knowing receipt' are both concerned with rights of priority in relation to property taken by a legal owner for his own benefit; cases of ‘knowing assistance' are concerned with the furtherance of fraud. In Belmont Finance Corporation Ltd v Williams Furniture Lt [1979] Ch 250, the Court of Appeal insisted that to hold a stranger liable for ‘knowing assistance' the breach of trust in question must be a fraudulent and dishonest one. In my judgment it necessarily follows that constructive notice of the fraud is not enough to make him liable. There is no sense in requiring dishonesty on the part of the principal while accepting negligence as sufficient for his assistant. Dishonest furtherance of the dishonest scheme of another is an understandable basis for liability; negligent but honest failure to appreciate that someone else's scheme is dishonest is not.

In Re Montagu's Settlement Trusts [1987] Ch 264, 285, Sir Robert Megarry V-C doubted whether constructive notice is sufficient even in cases of ‘knowing receipt.' Whether the doubt is well founded or not (as to which I express no opinion), ‘knowing assistance' is an a fortiori case.

Knowledge may be provided affirmatively or inferred from circumstances. The various mental states which may be involved were analysed by Peter Gibson J in Baden's case [1983] BCLC 325 as comprising: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

According to Peter Gibson J, a person in category (ii) or (iii) will be taken to have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only.

The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious inquiries, the question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it, had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed to make inquiries because `he did not want to know' (category (ii)), or because he regarded it as `none of his business' (category (iii)), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.

In the present case, Mr Bowers did not participate in the furtherance of the fraud and he cannot be held directly liable on this ground. Mr Jackson and Mr Griffin, however, clearly did. Mr Jackson set up the arrangements and employed Mr Griffin to carry them out. The money was under their control from the time it was paid into Baker Oil's account until the time it left Jackson & Co.'s clients' account in the Isle of Man Bank. One or other of them gave the actual instructions to the banks which disposed of the money. They plainly assisted in the fraud. The sole remaining question is: did they do so with the requisite degree of knowledge?

Notes on the knowing assistance claim in Agip (Africa):

(i) In addition to the tracing claims, knowing assistance claims were successfully made against various defendants: Jackson and Bowers were partners in the firm of chartered accountants (Jackson & Co.), and Griffin was an employee. Jackson and Griffin were also the only shareholders of Baker Oil. Jackson and Griffin were also directors of Euro-Arabian Jewellery Ltd., which owned Kinz, a French company which eventually received most of the money, and of which Fox L.J. observed that "There is no evidence that Euro-Arabian carried on any genuine business activity." Euro-Arabian had also been used as a "cut-off" company in the previous frauds against Agip.

Successful claims were made against Jackson and Griffin but not Bowers, who though a partner in Jackson & Co., had no relevant knowledge of the transactions. However, Bowers was liable for his employee and co-partner.

(ii) But note the nature of the dishonesty in Agip. It does not seem to be necessary for the defendant to know the exact nature of the fraud. In Agip Africa the action succeeded against the money launderers' accountants, who may have believed only that they were participating in an illegal currency transaction, contrary to the exchange control laws of Tunisia. However, in Bank Tejarat, it was not enough simply for the defendants to be aware that CAK (who committed the fraud) was an offshore company, of the type often used for fraudulent purposes, since anonymity is also a reason for operating through an off-shore company. Note that in Bank Tejarat, both sides had accepted that knowledge within the first three Baden heads was required to establish liability for knowing receipt, and all the discussion in the case revolved around head (iii). However, Tuckey J. also observed that:

"At the end of the day it is a jury question: Was there dishonesty or want of probity?"


10.2. Some important distinction

10.2.1. Introduction

Before we embark upon a study of this area of law, there are two important distinctions that need to be grasped, that between personal and proprietary claims, and that between common law and equity.

The next page returns you to the important distinctions menu page, enabling you to choose which distinction to study.


10.2.2. Personal & Proprietary Claim

Before we embark upon a study of this area of law, there are two important distinctions that need to be grasped, that between personal and proprietary claims, and that between common law and equity.

It is fairly fundamental to distinguish between proprietary claims, which identify the plaintiff's property in the defendant's hands, and personal claims, which depend on the defendant's receipt, or other dealings with the plaintiff's property. This question asks you to identify some of the characteristics of each claim.

Do you need more details on the distinction between personal and proprietary claims?


(a) Protects against defendant's bankruptcy ü Proprietary û Personal

(b) Gives plaintiff increases in value of property ü Proprietary û Personal

(c) No need to show that defendant retains property Proprietary ü Personal

(d) Protects against destruction of the property Proprietary Personal

(e) Protects against inability to identify the property û Proprietary ü Personal


Answer (a): Proprietary

If you can assert that a bankrupt has property to which you have title, that property will not go to the bankrupt's trustee in bankruptcy, and you will therefore be protected against his / her bankruptcy. This is true whether the property is legal or equitable, and is the rationale, for example, of Quistclose trusts, and cases like Re Kayford [1975] 1 W.L.R. 279 (see further the section in the informal trusts workbook on Quistclose trusts).

Answer (b): Proprietary

If you can identify your property, then of course you get the benefit of any increases in value: see, e.g., A-G for Hong Kong v. Reid [1994] 1 A.C. 324, where Reid, a fiduciary who took bribes, was held to hold them on constructive trust for the Crown. The Crown was therefore able to assert equitable title to property purchased with the bribes, in this case houses which had significantly increased in value.

Answer (c): Personal

Personal claims are usually complete on receipt (there is no need even to show receipt in a knowing assistance action).

Answer (d): Personal

Yes it does, because liability is typically complete on receipt, and it does not matter what happens afterwards. Therefore, a personal claim is not defeated by the destruction of the property, at any rate after it has been received by the defendant.


Answer (e): Personal

Indeed it does, because there is no need to be able to identify the property, merely to establish a personal claim.


You are now going to be asked to categorise a number of actions into personal and proprietary claims - but note that some do not happily fit into either category, because they encompass both personal and proprietary claims.

Do you need more information on the distinction between personal and proprietary claims?


(a) The equitable tracing claim in Agip (Africa) v. Jackson
o ü Proprietary Personal Both

Answer (a): Proprietary

Unlike the money had and received claim, the equitable tracing claim in Agip (Africa) was proprietary, and for this reason, was confined to the $45,000 remaining in Baker Oil's account.


(b) The next-of-kin's claims in Re Diplock
o û Proprietary û Personal ü Both

Answer (b): Both

Personal and proprietary equitable claims were both advanced in Diplock.


(c) Common law tracing
o û Proprietary û Personal ü Both

Answer (c): Both

The term common law tracing covers both identification of the plaintiff's property in the defendant's hands (a proprietary claim, as in Banque Belge and FC Jones), and the money had and received claim in (e.g.) Lipkin Gorman and Agip (Africa).


(d) The money had and received claim in Lipkin Gorman v. Karpnale
o û Proprietary ü Personal Both

Answer (d): Personal

Money had and received is a personal action, complete on receipt of the money by the defendant, although it is (confusingly) also referred to as common law tracing.


(e) The claim in Banque Belge v. Hambrouck
o ü Proprietary Personal Both

Answer (e): Proprietary

The difficulty with Banque Belge is that there were three different judgments, so it is not easy to identify the ratio of the case.

However, the only judgment that is consistent with both Agip (Africa) and FC Jones is that of Bankes LJ, who clearly took the view that Banque Belge retained property throughout in the unspent money (which is all they claimed), because it had not passed as currency.

The best view is therefore (I suggest) that the claim was proprietary, not personal.

Some more questions of the same type - again, you are being asked to categorise claims as proprietary or personal.


(a) The substitution in Taylor v. Plumer
o ü Proprietary Personal Both

Answer (a): Proprietary

This was undoubtedly a proprietary claim, and the case is generally regarded as an authority on common law proprietary tracing. However, Lionel Smith ([1995] LMCLQ 240) argues that it was in fact decided on equitable principles. Whether it was in truth decided on common law or equitable principles, however, the claim was undoubtedly proprietary.


(b) The trustee in bankruptcy's action in the FC Jones case
o ü Proprietary Personal Both

Answer (b): Proprietary

The claim in FC Jones was (at least in Millett and Beldam LJJ's views) a proprietary common law claim, because property in the money never passed to Anne Jones, and the plaintiffs were able to claim its increase in value when it was invested.

Nourse LJ arrived at the same conclusion by the money had and received route, but it is difficult to justify his reasoning, since Anne Jones had received far less than was being claimed.

It may be objected that the claim was really personal because all Anne Jones ever had was a personal (debt) action to money, legal title to which was held by commodity brokers, and then a bank. But the plaintiff's claim was nonetheless a proprietary claim to Anne Jones' debt action, albeit that the debt action itself was personal. It would not have been affected if Anne Jones had been declared bankrupt (although it would have been rendered worthless by the bankruptcy of the commodity brokers or bank).

(c) Knowing receipt
o û Proprietary û Personal ü Both

Answer (c): Both

A knowing receipt claim is complete either on receipt by the defendant of the trust property, or on his or her later acquiring the necessary knowledge (see further the discussion in Agip (Africa)). The liability remains whatever happens to the property subsequently, so in this sense it is a personal liability.

However, a knowing receiver becomes constructive trustee of the property knowingly received. One effect of this is that if the property increases in value in the receiver’s hands, the beneficiary can claim the increase in value. If the property is sold by the receiver, the beneficiary can trace the proceeds, should he or she so elect. All the options that the plaintiff had in A-G for Hong Kong v. Reid will also be open to the beneficiary in a KR case.

It is also because of the imposition of the constructive trust that knowing receipt differs from tracing, in that the receiver remains liable even after having parted with the property (indeed, parting with it will constitute a breach of trust).

The knowing receipt action shares the advantages of both a personal and a proprietary claim, therefore.


(d) Knowing assistance
o Proprietary ü Personal ? Both

Answer (d): Personal

This must be a personal action, because there is no need for the defendant ever to receive any property. Knowing assistance is accessory-based, rather than receipt-based liability.

A knowing assister cannot therefore be a constructive trustee, legal title to trust property not having passed to him or her, but the knowing assister treated as if he or she is. Thus the answer "both" might just be appropriate.


10.2.3. Common Law & Equity

Common law and equity operate on principles that are very different, and the purpose of these questions is to examine those differences. On the next page we start with some very general questions about the way in which the two jurisdictions operate.

This then is about the differences in principle between common law and equitable claims - here you are being asked to categorise a number of attributes. But there is nothing really special about this area - the distinction between common law and equity here is much the same as elsewhere in the law.

Note that some of these attributes may apply both to common law and equitable claims.

When answering these questions think generally - we are not for the time being looking at any particular claim.

Do you need to refresh your memory on the fundamental differences between common law and equity?


(i) Defeated by a bona fide purchaser for value without notice
o Com. Law ü Equity

Answer: Equity

Generally speaking, common law title is good against the world, whereas equitable title is defeated by the bona fide purchaser for value of the legal title without notice. That is one of the most fundamental differences between the two systems of title.

(ii) Liability in principle strict
o ü Com. Law Equity

Answer: Common Law

Liability at common law is in principle strict; for example, it is possible to be liable in conversion without knowing the identity of the owner at common law. Liability for money had and received is also strict in principle (there is no evidence that the Playboy Club was aware in Lipkin Gorman of the source of Cass's money), although it is said to depend on the defendant being unjustly enriched, and is therefore defeated by his or her giving valuable consideration for the money.

Even if it was not clear before, however, it is now clear that equitable jurisdiction depends on conscience; this was central to the decision in Westdeutsche v Islington BC.


(iii) Works by imposition of charge on property
o û Com. Law ü Equity

Answer: Equity

The common law seems to require a clear identification of the property owned; this is one reason why it is not generally possible to trace at common law into mixed accounts. Equity however is more metaphysical, and makes use of the imposition of a charge. This makes it unnecessary to identify the precise property claimed; a charge can be imposed on all the money in the account, and this allows equity to trace into mixed accounts.

(iv) Defeated by change of position defence
o ü Com. Law Equity

Answer: Common Law

Because common law liability is strict, and is possibly based on unjust enrichment principles, it would arguably be unjust if no defence were available. The House of Lords in Lipkin Gorman held, as part of the ratio, that a change of position defence applied to a money had and received claim, the result being that the club were not liable for the winnings they paid out to Cass. The reasoning in Lipkin Gorman would appear, in principle, to apply to any unjust enrichment claim, where liability is strict.

The position in equity is less clear. Where liability is effectively strict, as for example with the donees in the Diplock personal claim, it seems reasonable for the same defence to be available as at common law. It is more difficult to justify the change of position defence where liability is fault-based, however, and since the imposition of a trust depends on the conscience of the trustee being affected, the rationale for allowing a change of position defence there must surely be weaker.



10.3 Tracing

Tracing at common law involves the identification of the plaintiff's property. If the plaintiff can identify his or her property in the hands of the defendant, the plaintiff may have various remedies in consequence, such as conversion. We begin with two simple questions on the identification of property.

1) X steals a car from Y and gives it to his friend Z. Who has property in the car?

• Y or Z

Answer: Y

X never obtains title to the car, and can therefore pass no title to Z. Notice that this is a gift, and therefore the Sale of Goods Act exceptions to the nemo dat principle cannot apply. Therefore Y retains his legal title to the car, and Z gets no title.

2) X steals £500 cash from Y and gives it to his friend Z. Who has property in the cash?
• Y or Z

Answer: Z

Money is different from other property, because at any rate if it is passed as currency, property passes to the recipient, whether or not the transferor has title to it. X never gets title (at least on the assumption that he or she has not mixed any of the money with his or her own), but on that assumption, can nevertheless pass good title to Z. Obviously, this defeats Y's title.

Actually, the position is not quite as clear as that, because of the assumption that the money is passing as currency. If it does not, then title remains with Y - this appears to have been Bankes LJ's view of what had happened in Banque Belge.

However, even if legal title does not pass to Z on the transfer, it most certainly does when the money is mixed, since the common law will not trace into mixed funds - this is one of the reasons why legal title passed to the local authority in Westdeutsche.

This question follows on from the last. What, if any, is the nature of Z's liability to Y? Assume that Z had no knowledge that the money had been stolen from Y, but that Z has not altered his or her position in reliance on the receipt of the money.

(a) Y has a proprietary tracing claim

(b) Y has a money had and received claim

(c) Y has no claim


Answer: (b)

Yes, because Z has been unjustly received, by receiving money to which he or she is not entitled (because at the time of receipt, it is still Y's money). The common law money had and received claim is strict liability, so it is no defence that Z was unaware of the source of the money. If Z had provided value, then Z might have a defence, but on these facts, the money was a gift.

Because money had and received is a personal claim, and is complete on receipt, Z remains liable whatever happens subsequently to the money - there is no need for Z to retain it.

Let us now suppose that X had mixed the money with his or her own before giving £500 to Z.


(a) This would defeat Y's claim against Z

(b) This would leave Y's claim against Z unaffected


Answer: (a)


As soon as X mixed the money with his or her own, title would pass to X - this is the logic of the stolen bag of coins example in Westdeutsche. Therefore, it would be impossible to assert that Z had received any of Y's money - and this would defeat the money had and received claim.

The questions on the next page ask you to distinguish between personal and proprietary claims.

X steals £500 cash from Y and gives it to his friend Z, who knows of its origin. Z spends £300 on a holiday and has £200 of it left. The £200 has never been mixed with any of Z's money.

Which (if any) of the following statements is correct, at common law?


(a) Y has a proprietary claim against Z for £500 û Yes ü No

(b) Y has a proprietary claim against Z for £200 ü Yes No

Answer (a): NO Answer (b): YES

Answer (a): There is clearly no proprietary claim for £500, since Y cannot identify more than £200 of his or her property still in Z's hands.

Answer (b) - certainly Y can identify £200 in Z's hands, but the problem is whether property has passed to Z, in which case Y's proprietary claim will fail. This depends on whether the money has passed as currency (in which case title will have passed to Z).

However, in an essentially similar situation in Banque Belge (where Mlle Spanogue had spent most of the money given to her by Hambrouck), Bankes LJ (whose judgment is surely the only one of the three which is consistent with both Agip (Africa) and the FC Jones case?) held that property in the remaining money had never passed to her, because it had not been passed as currency, and that the plaintiffs therefore had a proprietary claim to the money that she retained.

Although the reasoning in Banque Belge is not very strong, and the matter is certainly not beyond doubt, my preferred answer to this question is therefore "Yes."

(c) Y has a personal claim against Z at least for the £300 that have been spent ü Yes No

Answer (c): YES

This I think is clearly a true statement, since even if title to the money had not passed to Z when Z received it, giving rise to a money had and received claim, Z has acted subsequently in such a way as to defeat Y's title (by spending the money). This gives rise to a personal liability, and of course, the fact that the money is no longer in Z's hands is irrelevant.

Note that Z knew the source of the money, so cannot advance a change of position defence.


(d) Y has a personal claim against Z for the remaining £200 only Yes ü No

Answer (d): NO

The answer to this must be "no", because Y certainly has a personal claim for the £300 spent.


(e) Y has a personal claim against Z for £500 ? Yes ü No

Answer (e): NO

To some extent, this depends on the correct interpretation of Banque Belge, but following Bankes LJ's judgment there, my view would be:

(i) Y clearly has a personal claim for the £300 spent.

(ii) Property in the £200 remaining has not passed to Z, and therefore Y has a proprietary claim to it.

(iii) Because property in the £200 has not passed to Z, Y has no money had and received claim in respect of it.

The following questions, beginning on the next page, are elaborations on a similar fact situation.


The situation is the same as before, except that this time Z mixed all of the money in a bank account containing other money of his or her own before spending the £300.

The question is whether the following statement is true or false:

(a) Y has a personal action in respect of the entire £500, but a proprietary claim in respect of none of it.


• True

• False

Answer: True


This must surely be correct. The mixing of the money will have denied Y any proprietary claim, but equally, at latest at mixing Z receives (i.e., obtains title to) all of the £500 originally belonging to Y. Z is therefore liable in for money had and received for the entire sum.

The question on the next page further examines the differences between personal and proprietary claims.

Again, the facts are as before (but assume this time that Z keeps the money separate until he or she spends it). However, Z spends the money on a gold vase, now worth £1,000, instead of on a holiday.

(a) Can Y claim title to the vase?

• Yes

• No

Answer: YES


I think the answer is "yes", because on Bankes LJ's reasoning in Banque Belge, as long as the money is not mixed, property will not pass to Z until Z spends it. When Z buys the vase, Y can claim it on Taylor v. Plumer principles.

The answer is open to doubt only in that it depends on Bankes LJ's reasoning, which may not be correct.

The question on the next page examines Z's possible defences.

The situation is as before, but this time Z is a travel agent who is unaware of the source of the money, and in consideration for the £500 received from X, provides X with a holiday.

You are asked whether the following statement is true:

(a) Y's claims are unaffected by these changes in fact.


• True

• False


Answer: False

There can be little doubt now that the money passes to Z as currency, thereby defeating any possibility of a proprietary claim by Y.

Moreover, since Z has given consideration for the money, he or she is no longer unjustly enriched by its receipt. The giving of consideration is a complete defence to a money had and received claim. (Cf. Lipkin Gorman v. Karpnale.)

Therefore in this situation, Y is left without either a personal or a proprietary claim against Z.

The next page examines what is meant by consideration.

(a) Would your answer to the previous question be affected if Z had allowed X to gamble at his or her casino, rather than providing a holiday?


• Yes

• No


Answer: YES

The answer to the last question depended on Z providing consideration, to defeat Y's personal claim. However, the provision of gambling facilities is not consideration at common law - this is similar to Lipkin Gorman v. Karpnale.


10.3.1. Tracing at Common Law

10.3.1.1. Proprietary Tracing at Common Law

One of the main differences between legal and equitable title is that legal title is, in principle, enforceable against anybody in the world, and it might therefore be thought that if the plaintiff can establish that the defendant has his property, he should be able to recover it. However, whereas the common law developed an action for the recovery of a specific piece of land, it never extended this 'real' remedy to allow a plaintiff to recover a specific chattel. Although the common law acknowledged the plaintiff's ownership of the chattel, his action was a personal action in detinue, the remedy for which was damages. The defendant could therefore choose whether to return the plaintiff's chattel or pay him its full value as damages.

The Common Law Procedure Act 1854, s. 78, gave the court a discretion to order specific delivery of the chattel, and this power is retained by s.3 of the Torts (Interference with Goods) Act 1977. But there is no absolute right to the return of the chattel. The importance of the proprietary claim lies rather in the fact that it entitles the plaintiff to the full value of the chattel, in preference to the claims of the defendant's other creditors.

The common law also concluded that the plaintiff's right should continue even if the defendant has exchanged the plaintiff's property for some other property, or sold it and purchased other property with the proceeds. So long as it was possible to 'trace' his original property - that is, to show that what the defendant now holds can be regarded as simply a substitute - his claim is unaffected. In Re Diplock's Estate [1948] Ch 465, Lord Greene MR explained the doctrine in terms of the plaintiff ratifying the wrongful sale of purchase, to enable the legal owner to claim the substitute.

In Taylor v Plumer (1815) 3 M & S 562, Sir Thomas Plumer had handed over money to a stockbroker with instructions to purchase exchequer bonds, but the stockbroker instead purchased American investments and bullion, and attempted to abscond with these. He was caught before he could leave England, and the investments and bullion were seized by Plumer. The assignees of the stockbroker then brought an action to recover them from Sir Thomas, but failed. The investments and bullion were held to be Sir Thomas' own property. In effect, Plumer's money was traced into the investments and bullion for, according to Lord Ellenborough at p. 575,

"the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained as such".

As Millett LJ observed in Trustees of the Property of F.C. Jones & Sons v Anne Jones [1996] 3 WLR 703, Taylor v Plumer was actually decided on equitable principles (see also Lionel Smith [1995] LMCLQ 240), but claims to substitute assets were upheld in Banque Belge v Hambrouck [1921] 1 KB 321 and Lipkin Gorman v Karpnale Ltd [l991] 2 AC 548 (below), and indeed, in Trustees of the Property of F.C. Jones & Sons v Anne Jones itself. So it is clear that a substitution doctrine is recognised by the common law.

Two other points need to be made about the substitution doctrine. First, if it depends on ratification, the plaintiff is equally entitled not to ratify the transaction, and instead to claim property the original property. Secondly, where (e.g.) money is paid into a bank account, at any rate where it is unmixed with other money, it is exchanged for a chose in action against the bank. In Diplock, Lord Greene MR thought that there was no reason why the common law would not allow the substitution of the money into the chose in action:

"If it is possible to identify a principal's money with an asset purchased exclusively by means of it, we see no reason for drawing a distinction between a chose in action such as a banker's debt to his customer and any other asset. If the principal can ratify the acquisition of the one, we see no reason for supposing that he cannot ratify the acquisition of the other."

This passage was approved by Millett J in Agip (Africa) Ltd v Jackson [1990] 1 Ch 265.

The principle also works the other way round. If I have a chose in action against a bank, and write a cheque, drawing out cash, the common law also allows substitution of the chose in action into the money.

Although Millett J approved the Diplock passage, he thought that the principal was limited to following an asset into a changed form in the same hands, rather than following the same asset from one recipient to another. Millett J did not think that it necessarily followed that the common law allowed free tracing of choses in action from one person to another - it can do so, but only where the transfer is made by a tangible object. For example, the common law will trace choses in action from one person to another where they are transferred by a cheque, but not where the transfer is made electronically, as in Agip Africa itself, or in Bank Tejarat.



10.3.1.2. Money had and Received

A proprietary tracing claim depends upon the plaintiff being able to trace his actual property, or in Taylor v Plumer its product of or substitute, into the defendant's hands. In the case of currency, title will pass to the recipient, but the law imposes upon the recipient of (e.g.) money stolen from the plaintiff an obligation to reimburse the plaintiff with an equivalent sum.

From the House of Lords decision in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, and in particular the speech of Lord Goff, the basis of the action appears to be that the defendant has been unjustly enriched at the expense of the plaintiff. The claim is established merely by showing that the defendant has received the plaintiff's property. The defendant's knowledge (or lack of it) are irrelevant. Nor is the action defeated by the recipient later disposing of the money, or mixing it with his own money, since the claim is a personal and not a proprietary claim. In other words, there is no need for the plaintiff to identify his money in the defendant's hands - merely to establish that the defendant received the money. In Lipkin Gorman itself, all of the money received had been mixed after receipt, and some paid out, but that did not prevent the plaintiffs from suing for money had and received.

It is defeated, however, if the recipient has not been unjustly enriched. Innocently to receive stolen money in return for full consideration is not to be unjustly enriched at all, so that for example, a shop which has innocently taken stolen money to pay for its goods is not liable to the victim of the theft.

Consideration recognised by the common law must be provided, however. In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, the owners of the club were unable to claim that they had provided consideration for the money, since contracts by way of gaming and wagering were rendered null and void by the Gaming Act 1845, s. 18. Gambling contracts were therefore not contracts for consideration.

The case also establishes a change of position defence to the restitutionary common law claim, where the defendant has altered his position in good faith, so that it would be inequitable to require him to make restitution or restitution in full. This defence was used in Lipkin Gorman to limit the plaintiff's right to recover to the net winnings taken by the casino, rather than all the money gambled by the thief. Paying out money as winnings constituted a change of position by the club.

The change of position defence was also applied by Tuckey J in Bank Tejarat v Hong Kong and Shanghai Banking Corporation (Ci) Ltd and Hong Kong and Shanghai Bank Trustee (Jersey) Ltd [1995] 1 Lloyd's Rep 239.

It is not yet clear whether the change of position defence applies only to money had and received, or to any of the other restitutionary claims considered in this workbook.

It is also not clear what happens when money is paid to a second recipient, but Millett argues (convincingly, I would suggest) in (1991) 107 LQR 71, at p. 79, that since the action is personal and not proprietary, what happens to the money after it has been received by the first recipient is irrelevant. It becomes the property of the first recipient, and any subsequent recipient will be receiving the first recipient's money, rather than that of the plaintiff. It ought also to follow that the first recipient will only be liable to reimburse the value of what was received, and if he makes a favourable investment with it, he should be able to keep the benefit of that. Authority to the contrary can be found in Nourse LJ’s judgment in Trustee of the Property of F.C. Jones and Sons (a firm) v Anne Jones [1996] 3 WLR 703, [1996] 4 All ER 721, but this looks incorrect in principle, and it is in any case weak authority as Millett and Beldam LJJ reasoned on the basis of a proprietary tracing claim.


10.3.1.3. Changed of Position Defence

Common law liability (unlike equity in general) is in principle strict. It is however a defence to a money had and received claim to provide consideration, because then the recipient is not unjustly enriched. However, it must be consideration recognised by the common law - it was not in Lipkin Gorman.

Lipkin Gorman also established a partial defence of change of position, partial because it only applies to the money affected by the change in position. In the case itself, the club had changed its position by paying some money back to Cass as winnings, and this provided it with a defence regarding this money.

A change of position defence was also successfully argued in Bank Tejarat, where the defendant bank (even on the assumption, which was not established, that it had received the plaintiffs' money at common law), had paid it out to a third party in reliance upon an apparently lawful instruction.



10.3.2. Tracing at Equity

10.3.2.1. Comparison with Common Law


This part of the workbook is about proprietary equitable tracing. The personal claim in Re Diplock is dealt with separately, under the heading of personal equitable claims.

The next page asks you questions about Agip (Africa) v Jackson, where an equitable tracing claim succeeded but a common law claim failed, and it is therefore possible to compare the requirements for both.

We then consider other fundamental advantages of equitable tracing over its common law counterpart, for example where the money is mixed (beginning on page 6).

Tracing in equity is possible into mixed bank accounts. It was possible to trace in equity in Agip (Africa) v. Jackson, although it was not possible at common law. Note that the common law claim in Agip, had it succeeded, would have been a personal claim, complete on receipt, whereas the equitable tracing claim was proprietary in nature.

In the light of your knowledge of the differences between personal and proprietary claims, have a go at the following question:


(a) Both common law and equitable tracing claims in Agip were for $45,000

(b) Both common law and equitable tracing claims in Agip were for $518,000

(c) The common law tracing claim in Agip was for $45,000 and the equitable claim for $518,000

(d) The common law tracing claim in Agip was for $518,000 and the equitable claim for $45,000

Answer: (d)

Answer (d) - the common law claim was personal and therefore did not depend on the defendant's continued retention of the property, whereas the equitable claim did. The defendant had received $518,000, but only retained $45,000.

Some more questions on Agip (Africa) v Jackson, and also on Bank Tejarat v Hong Kong and Shanghai Banking Corporation, directed towards considering the differences between common law and equitable claims:

(a) The common law claim in Agip (Africa) succeeded
• û Yes ü No

Answer: NO

The common law claim failed, because it was impossible at common law to trace the money in the recipient's hands (Baker Oil) as the plaintiff's money.

There were two possible routes that the money might be said to have taken (see especially the diagrammatic representation of Agip Africa), but the common law could follow neither route.

One route would have been to trace the money through the New York clearing banks, but this was not possible because it had become mixed with other money, and there was the additional problem, alluded to by Fox LJ, that Lloyds had paid the money out to Baker Oil before being reimbursed via the New York clearing banks.

The other route would have been to trace via the telex from Banque du Sud to Lloyds Bank in London - surely this would have transferred a cause of action to Lloyds to be reimbursed, at any rate once they had relied on the telex? But the common law will only trace physical objects from one person to another - all that passed between the banks was a stream of electrons, which could not be traced.


(b) The equitable tracing claim in Agip (Africa) succeeded
• ü Yes No

Answer: YES

The equitable tracing claim succeeded, as we have seen for only the amount retained by Baker Oil (far less than the common law money had and received claim, which was for everything that they had received). The importance of this is that identification of the plaintiff's money must be easier in equity than at common law.

(c) The common law claim in Bank Tejarat succeeded û Yes ü No

Answer: NO

It failed for essentially the same reason as in Agip (Africa).

Note that an argument based on the movement of the drafts used in the payment process also failed, although had a cheque rather than a money order been used in Agip, the common law claim may well have succeeded. However, the drafts in Bank Tejarat were not performing the same function - see further the comparison between the causes of action in the two cases.


(d) Bank Tejarat's money could be traced in equity to the bank which had received it ü Yes û No

Answer: YES

It could however be traced in equity - the receiving bank retained none of the money, but it is sometimes necessary to be able to trace in equity to establish another equitable claim, such as knowing receipt.