Cardiff Law School
Cardiff Law School
Copyright © 1996 Wan Er Chu and Paul Todd.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.
Tracing money at common law is usually fraught with difficulties, especially where it has gone through bank (or similar) accounts, because of problems of identification. Identifying the money in equity is far easier, because equity is not defeated by the mixed bank account.
Trustee of the Property of F.C. Jones and Sons (a Firm) v Jones, The Times, 13 May 1996, is unusual in being decided entirely on the principles of common law tracing. The views of Millett and Beldam LJJ differ in material respects from those of Nourse LJ, but whichever approach is correct, the case takes a broad view of tracing at common law.
A supplier of F C Jones & Sons obtained judgment against the firm. The judgment was not satisfied and a bankruptcy notice was issued. The partners, Messrs F C Jones, F W J Jones and A C Jones, failed to comply with the notice, and thereby committed an act of bankruptcy. Between the act of bankruptcy and the adjudication, Mrs Anne Jones, the wife of Mr F W J Jones, opened an account with a firm of commodity brokers in order to deal on the London Potato Futures Market, and paid into it three cheques totalling stlg11,700, drawn on the firm's partners' account (at Midland Bank).
Mrs Jones' dealings in potato futures proved to be highly profitable. She received two cheques totalling £50,760 from the commodity brokers and paid them into a call deposit account (at Raphaels), in which there was remaining a balance of £49,860. This money was claimed by the trustee in bankruptcy, on the grounds that the legal title was vested in him, and had been since the time of the act of bankruptcy.
The trustee in bankruptcy was entitled to the entirety of the £49,860 remaining the call deposit account, and hence the profit element. In Millett LJ's view, this was a proprietary claim, none of the money having been mixed with other money, and no property having passed to Mrs Jones. He thought that in contrast, a money had and received action ought, in principle, to be limited to the amount of the money received, but that the trustee had made a proprietary rather than a personal claim. Beldam LJ's reasoning was essentially similar to that of Millett LJ. Nourse LJ, however, reached the same conclusion, apparently on the basis of a money had and received claim.
The interest in Millett LJ's judgment lies in the identification reasoning, enabling the plaintiff to identify the money as still in the defendant's hands, despite having been invested since its receipt in commodity futures. The interest in Nourse LJ's judgment is that he appears prepared to allow recovery for a profit element, even in a money had and received (i.e., personal) action.
In Agip (Africa) Ltd v Jackson  1 Ch 265, Millett J, whose decision was upheld in the Court of Appeal ( Ch 547) observed (at p 282G) that "the common law claim for money had and received is a personal and not a proprietary claim and the cause of action is complete when the money is received." To establish liability for money had and received, therefore, all that would have been necessary was to establish that she received £11,700, and that at the time of receipt, the plaintiff had title to the money. Whether or not the plaintiffs retained property in the money after its receipt by Mrs Jones would have been irrelevant. Since she had provided no consideration, and had no change of position defence, she would have been required to repay the money she had received.
The problem in F C Jones was that the plaintiffs also claimed the profits the defendant had obtained on investing the money. They could obviously succeed if they could show that they still had title to the money; where property belongs to the plaintiff, he or she can benefit from any increase in its value. It matters not whether the title is legal or equitable. Thus, in A-G for Hong Kong v Reid  1 AC 324, because the defendant was constructive trustee for the plaintiff of the bribes he had received, the plaintiff had a beneficial interest in the bribes, and hence in anything purchased using bribe money. If the property purchased, in this case houses in New Zealand, increased in value, then the plaintiff obtained the benefit of that increase also.
A proprietary claim will also give the plaintiff security in the event of the defendant's bankruptcy (that was not an issue in F C Jones, since Anne Jones was at all times solvent). It involves the plaintiff in identifying his or her property in the hands of the defendant, and its main limitation is that if the defendant no longer has the property, a proprietary claim will not be available. Nor will it be available if the property no longer exists in a traceable form. If what is asserted is equitable title, that means traceable in equity, whereas if (as in F C Jones) it is legal title, it means traceable at common law.
By contrast, a personal action is complete on the defendant's receipt of the money, and it is unnecessary for the plaintiff to show further that the defendant still has it. It is also unnecessary for the plaintiff to identify the property, at any rate beyond its receipt by the defendant, so that it does not matter if the property is no longer traceable, or even if it has been destroyed. But the personal action is of little or no use where the defendant is bankrupt. Also, because the basis of any action is the defendant's (unjustified) receipt of the money, what happens after its receipt by the defendant ought, in principle, to be irrelevant. In that case, then if the defendant invests it so as significantly to increase its value, the plaintiff should not be able to claim in respect of that increase.
Millett and Beldam LJJ's judgments are consistent with the above analysis, because in their view, title to the money never passed to Anne Jones, and it remained traceable at common law. So for them, this was a proprietary claim at common law. However, Nourse LJ's approach, by which a profit element is also available on a personal action for money had and received, is not consistent with the above analysis.
The reasoning in F C Jones was based entirely upon the common law, and the proprietary reasoning of Millett and Beldam LJJ therefore required that the money remained traceable at common law (by contrast, Nourse LJ's reasoning required merely that it could be traced initially into the hands of Anne Jones). Identifying money is generally easier in equity, especially where it is necessary to trace it through a bank or similar account, but Millett LJ did not think Mrs Jones had received the money in a fiduciary capacity, and it is now clear beyond doubt that tracing in equity requires an initial fiduciary relationship (in particular from the decision of the Privy Council in Re Goldcorp Exchange Ltd  1 AC 74, but also from the approval of Re Diplock's Estate  Ch 465 by the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council  2 All ER 961, by Lord Browne-Wilkinson, at p 996e). She did not obtain legal title at all, so could not have become a trustee. It was for this reason that common law reasoning was adopted.
Another distinction between common law and equity is that liability at common law is strict, whereas equity looks to the fault of the defendant (Birks, 1989). Neither the proprietary common law tracing claim, nor the personal action for money had and received, is dependent on the knowledge or fault of the defendant, although the personal action is subject to various defences, such as that the defendant provided consideration, or had changed his or her position (see Lipkin Gorman (a firm) v Karpnale Ltd  2 AC 548). By contrast, equity will not generally intervene unless the defendant's conscience is affected, a point reiterated in the House of Lords in Westdeutsche, so that the imposition of constructive trusteeship on the basis of knowing receipt is dependent on the defendant's knowledge. (While a proprietary equitable tracing claim does not necessarily depend on the defendant's knowledge, it is defeated by a bona fide purchaser for value without notice, and the same is true of the personal action in Re Diplock's Estate  Ch 465.)
In F C Jones itself, this distinction between equity and the common law was probably not material, since Anne Jones was aware of all the relevant facts, and if legal title had passed to her, she would probably have become a constructive trustee. This would also found have founded the fiduciary relationship necessary for an equitable tracing claim, and on either basis, she would have been liable in respect of the profit element. In a sense, therefore, F C Jones does no more than remove an anomaly, by reaching the same result even though legal title had not passed. But in removing one anomaly it arguably introduces another, because where the recipient's conscience is not affected, there will be no liability in equity at all (see further below), but there will at common law, if legal title has not passed. The result will therefore continue to depend on whether or not legal title has passed.
At first instance, His Honour Judge Cherryman QC had held that Mrs Jones held the money as constructive trustee, in which case there would have been no difficulty in establishing a proprietary claim, including the profit element, in equity. In Millett LJ's view, however, she could not be a constructive trustee, because she had never obtained any title to the money at all. The effect of the doctrine of relation back was that legal title had at all times remained in the plaintiff, and that therefore, Mrs Jones could never have become a trustee. It was therefore necessary, in Millett LJ's view, to identify the property at common law, as recourse could not be had to equitable tracing principles.
Millett LJ examined the effect of the doctrine of relation back under bankruptcy, referring to his own judgment in Re Dennis  3 WLR 367 and the decision of the Court of Appeal in Re Gunsbourg  2 KB 426. His conclusion was that the effect of the act of bankruptcy committed by the partners of F C Jones & Sons, followed as it was by the adjudication of bankruptcy, was to vest legal title in the trustee in bankruptcy as from the date of the act of bankruptcy. He had observed in Re Dennis (at p 387) that this meant that:
"The position of the debtor and persons who claimed under him during the intermediate period was extremely curious. They did not possess a defeasible title, but either an indefeasible title if the act of bankruptcy was not followed by adjudication or no title at all if it was. Outside the law of bankruptcy no similar ambulatory title was known to the law."
In F C Jones, therefore, title to the assets of F C Jones & Sons had vested in the trustee in bankruptcy from the date of the act of bankruptcy, and therefore the partners could pass no title, legal or equitable, in the £11,700 to Anne Jones.
In order to obtain the profit made from the £11,700, however, in Millett LJ's view, the trustee in bankruptcy had to trace the money into the account at Raphaels, although of course, it must have become mixed with other money in the London Potato Futures Market. In Agip (Africa) Ltd v Jackson  Ch 547, the plaintiffs were unsuccessful in tracing, at common law, their money into the hands of the recipient (Baker Oil), when it had passed through the New York clearing bank system, although they were successful in an equitable tracing claim. The same difficulty would have applied here to the money, but Millett LJ did not think it necessary to trace the money itself. As he had himself observed, extra-judicially (Millett, 1991, p 73), and also judicially at first instance in Agip (Africa) Ltd v Jackson  1 Ch 265 (at p 285E), that whereas the common law can only follow a physical asset, such as a cheque or its proceeds, from one person to another, it can follow property into its product, and will substitute causes of action for tangible property, and vice versa, as long as the property remains in the same hands. This had, in any case, long been clear from Lord Greene MR's judgment in Re Diplock's Estate  Ch 465, at p 519:
"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."
It was necessary, therefore, for the trustee only to follow the money in the firm's partners' account (at Midland Bank), which had been vested in him by the act of bankruptcy, into the proceeds of the cheques which Mrs Jones received from her husband, and thence into the chose in action, which was vested in Mrs Jones when she paid the cheques into the account with the commodity brokers. That was sufficient to establish that the trustee owned the chose in action, and it was that, of course, which increased in value. That was sufficient to establish the trustee's proprietary claim at common law.
Beldam LJ gave a judgment which was essentially similar to Millett LJ's, but without going into Millett LJ's detailed analysis of the tracing authorities.
As authority for the common law's ability to substitute assets for their products, Millett LJ cited Lipkin Gorman (a firm) v Karpnale Ltd  2 AC 548, where the plaintiff's property, a chose in action against the bank which held the solicitors' clients' account, was converted into the cash which was drawn out of the account by one of the partners, Cass, and paid to the defendant casino. He also cited Banque Belge pour l'Etranger v Hambrouck  1 KB 321, where money owned by the plaintiff bank was stolen by Hambrouck, and placed in his bank account. It was then converted into the cheques drawn by Hambrouck and paid into his friend, Mlle Spanogue's account. Banque Belge was able to claim legal title to the money remaining in Mlle Spanogue's account. (Note that Millett LJ treats Banque Belge as a proprietary claim; see also Agip (Africa) Ltd v Jackson  1 Ch 265, at p 285 D-E.)
Two points need to be made about these authorities. First, Millett LJ did not think either had been weakened by their reliance upon, and misunderstanding of, Taylor v Plumer (1815) 3 M & S 562. Taylor v Plumer had been taken as authority for the ability of the common law to trace an asset into a changed form in the same hands, but it had later been shown by Lionel Smith (Smith, 1995) that it was, in reality, an application of equitable tracing rules. However, Millett LJ observed that in Taylor v Plumer, Lord Ellenborough LC gave no indication that he was applying rules which were peculiar to equity, and it might reasonably therefore be assumed that the rules of each system were, to this extent at least, the same. Secondly, the reasoning in Banque Belge depended on the entirety of the money in both Hambrouck's and Mlle Spanogue's accounts being traceable to the plaintiffs, no other money having been paid into either account. Indeed, F C Jones itself depended on Mrs Jones having at all times kept the trustee's money separate, unmixed with any of her own. In Re Diplock's Estate, above, Lord Greene required identification of the money with an asset purchased exclusively by means of it, which again suggests that all of the money would need to be converted into a single cause of action, or vice versa. It would seem at first sight, therefore, that Millett LJ's judgment in F C Jones is not of general application, but in fact, the result would have been exactly the same if the money had been mixed.
An argument advanced by Millett LJ in support of his conclusion was that, if the cheques had passed legal but not equitable title to Mrs Jones, she would have received the money as constructive trustee and been liable to a proprietary claim in equity. It would be absurd, in Millett LJ's view, "if a person with no title at all were in a stronger position to resist a proprietary claim by the true owner than one with a bare legal title." Millett LJ also said that there was no merit in having different tracing rules in law and in equity, and that although there are in fact different rules, there is no merit in creating unnecessary differences between the two systems. However, a comparison between the operation of the two systems in a case such as F C Jones clearly illustrates that whereas the common law concentrates on restitution to the plaintiff, equity is concerned with the conscience of the recipient. Whether that is a rational distinction is, of course, debatable.
Central to this discussion is Westdeutsche Landesbank Girozentrale v Islington London Borough Council  2 All ER 961, which was decided in the House of Lords a few days after the Court of Appeal decision in F C Jones. One of the arguments advanced in Westdeutsche (see also Birks, 1992) was that where a bank had advanced money to a local authority in the belief (shared by the local authority) that this was in pursuance of a valid swap agreement, the local authority held the money on resulting trust for the bank when swap agreements were later held to be outside the powers of local authorities (in Hazell v Hammersmith and Fulham London BC  2 AC 1), and hence ultra vires and void ab initio. (The bank was forced to concede that legal title had passed to the local authority, as soon as the local authority had mixed the money with other money of its own, since the bank would have been unable to identify its property at common law.) The bank's argument was rejected, Lord Browne-Wilkinson observing (at p 988b) that it is a fundamental principle of trust law that equity operates on the conscience of the owner of the legal interest. By the time the local authority's conscience was affected (by the knowledge that the swap agreement was void), the mixed bank account had become overdrawn, so that the trust property was no longer traceable, even in equity. There was thus no time when both the conscience of the recipient was affected, and identifiable trust property existed, so that the fundamental requirements of a trust were never satisfied.
In F C Jones, Millett LJ suggested that Mrs Jones would have become a constructive trustee had she obtained legal title to the money, which implies that he regarded her conscience as affected. Certainly, she appears to have been aware of all the relevant facts. But if instead of keeping the investment representing the three cheques separate, she had paid them into a mixed account, such that the money was no longer traceable at common law, then legal title would have passed to her, just as it had passed to the local authority in Westdeutsche. Since her conscience was affected, however, she would have taken the money as constructive trustee, and the profit would have been recoverable in an equitable proprietary claim. The result would have been the same, therefore, even had the money been mixed, on the assumption that Mrs Jones' conscience was affected.
If, on the other hand, Mrs Jones had been an innocent recipient of the money, the position would have been different. If she had obtained legal title, whether by mixing the money with her own or otherwise, then since her conscience would have been unaffected, she would not, on the basis of the majority view in Westdeutsche, have taken as trustee, and the trustees in bankruptcy would have had no claim for the profits, either at common law, or in equity. (They would still have succeeded in an action for money had and received, but, subject to Nourse LJ's view below, would not have recovered the profit element.) In this case, however, legal title is relevant, because if it had not passed to her, the result would have been exactly the same as in F C Jones itself, and the profit element would have been recoverable at common law.
The interplay between the two systems therefore comes down to no more than this. If the recipient's conscience is affected, then a proprietary claim will succeed, whether or not legal title passes to the recipient. If legal title passes, the recipient becomes constructive trustee; in not, then the proprietary claim succeeds at common law, as in F C Jones itself. If the recipient's conscience is unaffected, then (on the basis of Westdeutsche) there is no proprietary claim in equity, but there will be at common law as long as legal title has not passed. The technicalities of common law tracing continue to be relevant to that extent, therefore.
Nourse LJ reached the same result as Millett and Beldam LJJ, but apparently on the basis of a money had and received claim. This is quite contrary to the orthodox view of a money had and received claim, which is complete on receipt. Indeed, in F C Jones Millett LJ had observed that:
"... in an action for money had and received it would be irrelevant what Mrs Jones had done with the money after she had received it. Her liability would be based on receipt of the money, and she would be personally liable to a money judgment for £11,700."
The inference is that whatever Mrs Jones had done with the money after receiving it, she would be liable to repay £11,700, no more and no less.
Nourse LJ explained how he was extending orthodox principles, but felt that he was entitled to do this on the basis of Lord Mansfield CJ's view of money had and received in Clarke v Shee and Johnson (1774) 1 Cowp 197, at p 199:
"This is a liberal action in the nature of a bill in equity; and if, under the circumstances of the case, it appears that the defendant cannot in conscience retain what is the subject matter of it, the plaintiff may well support this action."
In Nourse LJ's view, therefore, the case was simply one where Mrs Jones could not in conscience retain the profit, since she could not have obtained the profit without the use of the original.
Cases involving proprietary tracing of money at common law are sufficiently rare for any such case to be noteworthy, but Millett LJ's view is essentially similar to that of Bankes LJ in Banque Belge pour l'Etranger v Hambrouck  1 KB 321, and indeed, the ability of the common law to convert between money and choses in action was necessary to the decision in Banque Belge itself, assuming that the earlier case was indeed decided on common law principles.
At first sight, Millett LJ's view is limited to the unusual situation where the money is not mixed with any of the recipient's own, but closer examination shows that he is merely removing an anomaly. Had the money become mixed, legal title would have passed to Mrs Jones, and she would have been liable as a constructive trustee. Clearly, there is no reason why should be better off merely because the money never became mixed. It is, however, more difficult to justify the result where the recipient's conscience is unaffected, since in that event, the outcome will depend on whether or not the money is mixed.
Nourse LJ's view is far more radical than that of Millett LJ, but seems to confuse personal and proprietary claims. It is also unclear when the broad brush principles derived from Lord Mansfield CJ's judgment will apply. It is therefore to be hoped that the views of Millett LJ, rather than those of Nourse LJ, will be developed in future cases.
Birks, P (1989) 'Misdirected funds: restitution from the recipient'  Lloyd's Maritime and Commercial Law Quarterly 296.
Birks, P (1992) 'Restitution and Resulting Trusts', in Goldstein, S (ed) Equity and Contemporary Legal Developments (The Hebrew University of Jerusalem).
Millett, PJ (1991) 'Tracing the Proceeds of Fraud' 107 Law Quarterly Review 71.
Smith, LD (1995) 'Tracing in Taylor v Plumer: Equity in the Court of King's Bench'  Lloyd's Maritime and Commercial Law Quarterly 240.