Tracing and Common Law Claims to Substitute Assets: Separating Myth From Reality Jonathan Silver Submitted in accordance with the requirements for the degree of Doctor of Philosophy De Montfort University Faculty of Business and Law, United Kingdom Supervisors Mr Tim Hillier Dr Tatiana Cutts March 2018 I confirm that the work submitted is my own. I further confirm that appropriate credit has been given within the thesis where reference has been made to the work of others. 1 Abstract Tracing is a process by which a claimant shows that an asset represents a substitute for an original asset for the purposes of making a claim in respect of that substitute. Orthodox tracing theory says that this process involves the following of the value inherent in the original into the substitute. Orthodox theory also states that tracing is a neutral process, unconnected to any claims that may be made in the substitute. The effect of accepting this orthodoxy has been that the true nature of the tracing process has become obscured. In particular the failure of orthodox theorists to correctly identify tracing as being an exercise that can only be justified within the context of a fiduciary relationship has led to the widespread belief that it is possible to trace at common law. It will be argued in this thesis that this cannot be the case because the common law allows no claims with respect to substitute assets, and this makes the tracing exercise redundant. The notion that it is possible to trace at common law is contrary to properly understood authority and has no normative foundations. Its origins lie in a case that is now universally accepted as containing no common law reasoning. Despite this the right to trace at common law remains the prevailing orthodoxy. None of the cases cited in support of that orthodoxy have been satisfactorily explained. The most significant ones fail to adequately deal with the inherent difficulties in treating money in a bank account as being the equivalent of a physical mixture of tangible assets. The lack of any proper normative explanation of the right to trace expounded in these cases makes their utility even more questionable. 2 This thesis will argue that the rationale behind tracing is such that it can never be utilised to explain non-fiduciary liability. 3 Table of Contents Abstract ............................................................................................... 2 Table of Abbreviations. ........................................................................ 7 Table of Cases ...................................................................................... 8 Table of Statutes ................................................................................ 12 Introduction ....................................................................................... 13 Part 1.Tracing, Following and Claiming ............................................... 22 Chapter 1. Following. ......................................................................... 23 Introduction.................................................................................... 23 A Simple Example. .......................................................................... 28 Specification and Accession. ........................................................... 29 Mixtures. ........................................................................................ 33 Following Money. ........................................................................... 37 Following Money Through Bank Accounts. ..................................... 41 Mixed Bank Accounts. ..................................................................... 44 Following and Tracing. .................................................................... 48 Following and Claiming. .................................................................. 49 Conclusion. ..................................................................................... 51 Chapter 2. Tracing. ............................................................................. 52 Introduction.................................................................................... 52 Tracing and Rights .......................................................................... 56 Tracing Value. ................................................................................. 58 Exchange Value ............................................................................... 59 Value as Wealth .............................................................................. 61 Value as Exchange-Potential. .......................................................... 64 Improvements to Assets. ................................................................ 66 Tracing Through Transactions. ........................................................ 67 Tracing and Credit. .......................................................................... 74 Tracing as a Normative Exercise. ..................................................... 77 Tracing and Claiming. ...................................................................... 78 Tracing at Law and in Equity. .......................................................... 83 Common Law Tracing and Mixed Funds. ......................................... 84 Conclusion. ..................................................................................... 86 Part 2. Claims to Substitute Assets at Common Law ........................... 88 4 Introduction.................................................................................... 89 Chapter 3. The Origins of the Notion of Common Law Tracing ........... 93 Introduction.................................................................................... 93 Equitable Claims to Substitute Assets. ............................................ 93 Equity and Bankrupt Agents. ........................................................... 93 Equitable Claims and the Common Law. ......................................... 95 Agents Acting Outside the Scope of Their Authority. .................... 102 Conclusion. ................................................................................... 115 Chapter 4.Tracing and the Law of Property Part 1. ........................... 116 Introduction.................................................................................. 116 Property as a Principle. ................................................................. 118 The Transmission of Rights. .......................................................... 120 Vindication of Original Rights. ....................................................... 122 Property as a rights-creating event ............................................... 128 The Transfer of Personal Property Rights. ..................................... 131 Remedies for Interference with Property Rights. .......................... 134 Choses in Possession. .................................................................... 134 Conversion. ................................................................................... 137 Choses in Action ............................................................................ 138 The Authorities. ............................................................................ 140 Banque Belge Pour L’Etranger v Hambrouck. .................................. 141 F.C. Jones & Sons (Trustee in Bankruptcy) v Jones......................... 156 Conclusion .................................................................................... 162 Chapter 5 Tracing and the Law of Property – Part 2. ......................... 163 Introduction.................................................................................. 163 Agip (Africa) Ltd v Jackson and Others. ......................................... 164 Armstrong DLW v Winnington Netorks Ltd. .................................. 169 The EUAs. ...................................................................................... 172 The Equitable Claim ...................................................................... 175 The Restitutionary Proprietary Claim. ........................................... 175 Littlewood v Williams. .................................................................. 181 Branwhite v Worcester Works Finance ......................................... 184 Re Leslie Engineers. ...................................................................... 186 Conclusion. ................................................................................... 189 Chapter 6 Unjust Enrichment and Claims to Substitute Assets ......... 191 Introduction.................................................................................. 191 Tracing and the Institutional Structure of Unjust Enrichment Law. 192 Enrichment. ................................................................................... 193 At the Expense of the Claimant. .................................................... 197 5 Unjust Factors and the Alternative Claim Analysis. ....................... 201 The Argument from Authority. ..................................................... 204 Lipkin Gorman v Karpnale Ltd. ...................................................... 205 Unjust Enrichment and Proprietary Claims. .................................. 227 Conclusion. ................................................................................... 239 Part 3. Equitable Claims to Substitute Assets ................................... 240 Chapter 7. Equitable Claims To Substitute Assets. ...........................