THE LAW OF TRACING

One of the most effective remedies available to a beneficiary who has been deprived of the trust property as a result of a breach of trust by the trustee is to be found in the law of tracing. ‘Tracing’ of trust property – either ‘at law’ or ‘in equity’ – enables a claimant to identify his ownership of property into whosoever’s hands that property falls and to recover it to the extent that the defendant still possesses it. Most importantly, it is clear that a claimant who relies on the tracing process is tracing his or her ownership of the property irrespective of the form the property has taken in the hands of the defendant. In Foskett v McKeown (2000), Lord Millett drew a distinction between ‘following’ and ‘tracing’. Both processes involve exercises in locating the assets of the claimant. ‘Following’ is the process of identifying the same asset as it moves from hand to hand. ‘Tracing’ is the process of identifying a new asset as a substitute for the old. For example, if the trustee wrongly distributes trust property – being cash – to X, and X uses that cash to purchase a car, the claimant may ‘trace’ his ownership through the cash into the car and recover it from X. It should also be noted at this early stage that the remedies attached to the process of tracing and the liability of a stranger as constructive trustee (Chapter 7) are frequently complimentary. So, a third party who has received trust property with ‘knowledge’ that there has been a breach of trust may be a constructive trustee and subject to the tracing process. In the former case (that is, that of constructive trusteeship), he must hold the trust property for the beneficiaries and be subject to a personal liability. As we shall see in the case of successful tracing, the defendant may be entirely innocent but must still return the property in its present form to the rightful owners.