Equitable Remedies and Tracing — SQE1 FLK2 Trusts Law

A trustee pays £20,000 of trust money into his own current account, which already holds £30,000 of his. Over four months he draws on it for living expenses. At its lowest the account stands at £15,000. Then he pays in £25,000 of salary of his own, so the balance today is £40,000. He is bankrupt. How much can the beneficiary trace?

Not £20,000. Not £40,000. £15,000. This is Equitable Remedies and Tracing, the last topic in Trusts Law, and that account is where we finish. Everything before it is about which remedy you ask for. The account is about whether there is anything left to ask for.

Here is the route. What makes a remedy equitable, and why that means discretionary. Then the four you must know: injunction, specific performance, rescission, rectification. Then the two money remedies against a fiduciary, and why you must choose. Then the defences. And then tracing, which is not a remedy at all.

Start with the divide. A common law remedy is available as of right. Prove the breach and the loss, and the court must award damages. It has no discretion to withhold them. An equitable remedy is discretionary. The court may refuse it to a claimant who has proved every word of her case.

What moves that discretion? The conduct of the parties, the balance of hardship, whether the claimant has delayed, and whether damages would do anyway. So a neighbour who proves a breach of covenant, but who waited years and would cause real hardship, may be left to her damages.

Two principles run underneath. He who comes to equity must come with clean hands. But the misconduct has to bear an immediate and necessary relation to the equity sued for. It must taint the very claim being made. Unrelated bad behaviour disqualifies nobody.

And equity acts in personam. Against the person, not the property. An injunction orders a defendant to do or not do something. It does not attach to the asset. So if he sells in defiance of the order, he is in contempt, and the innocent buyer who paid full value still gets good title.

Injunctions first. Prohibitory, telling the defendant not to do something. Mandatory, telling him to take a positive step. Interim, before trial, to hold the position. Final, after it. And quia timet, where the harm has not happened yet but is coming.

The foundational test is whether damages would be an adequate remedy. If money can put the claimant right, money is what she gets. Which is why injunctions matter most where the subject matter is unique, or the harm is ongoing, or it cannot be undone.

For interim injunctions the test is American Cyanamid, and it has three stages. First, is there a serious question to be tried? A low threshold. The claim must not be frivolous or vexatious. The court is not trying to predict who wins.

Second, would damages be adequate? For the claimant, if the injunction is refused and she then wins. And for the defendant, protected by her undertaking in damages, if it is granted and she then loses. Third, and only if damages are inadequate for both, the balance of convenience. Which course carries the lesser risk of injustice?

And an injunction is not automatic even for a proved breach. Under Lord Cairns' Act, now s.50 of the Senior Courts Act 1981, the court may award damages in lieu. The working rule has four limbs. The injury is small, it can be estimated in money, it can be met by a small payment, and an injunction would be oppressive.

Specific performance next. It compels a party to do what he promised, and it is granted where damages would be inadequate. Contracts for the sale of land are the classic case, because every piece of land is treated as unique. So the buyer of one identical house on an estate of identical houses can still compel completion.

A rising market is a reason a seller wants out of his bargain. It is not a reason equity releases him from it.

Now a limit. A programmer walks out of a two-year contract with eighteen months to run. Her skills are unusual, the company cannot replace her, and it does not want damages. It wants her back at her desk. Can the court order that?

No. Specific performance is never ordered of a contract for personal services. Equity will not compel one person to work for another. And s.236 of the Trade Union and Labour Relations (Consolidation) Act 1992 forbids any court to do it by specific performance or by injunction. The remedy is damages, however little the company wants them.

But a door is left open. An express negative covenant in such a contract can be enforced by injunction. A footballer who promised not to play for anyone else can be restrained from playing for a rival. The limit is that the injunction must not in practice force him back, or leave him idle and unable to earn a living.

One more bar. The court will not order performance that needs its constant supervision. A covenant to keep a shop open and trading is the standard example. The landlord's remedy is damages, however damaging an empty anchor unit is to the centre.

Rescission. It sets the contract aside ab initio, from the beginning, and unwinds it. Each side gives back what it received. It is not compensation and it does not measure a loss. The grounds are the vitiating factors: misrepresentation, mistake, undue influence, and duress.

Four bars take it away. Impossibility of restoration, where the subject matter has been destroyed or fundamentally changed. Third party rights, where a bona fide purchaser has got in first. Affirmation, where the claimant, knowing of the right to rescind, keeps the contract on foot. And lapse of time.

Affirmation is the one that catches people. A buyer learns he was lied to. He then runs the business for six months, spends his own money improving it, and takes the supply contracts into his own name. He has elected to keep it. Fraud does not save him. He knew the truth and acted as owner anyway.

And equity does not insist on perfect restoration. Where substantial restoration is possible the court can rescind on terms, making allowances for use and deterioration. A mine that has been worked for months can still be handed back, with an account for what was taken out.

Rectification corrects the document, not the bargain. It is available where the written record fails to say what the parties actually agreed. It cannot improve a bad deal or add a term nobody agreed. If the document says what was agreed, regret is not a ground.

Two limbs. Common mistake: both parties shared an intention that continued down to signature, and by mistake the document does not express it. What matters is what they actually and subjectively shared, outwardly manifested, not what a reasonable observer would have taken them to mean.

Unilateral mistake: one party is mistaken about a term, the other knows it, says nothing, and stands to benefit. A price typed as £580,000 when every meeting said £850,000, spotted by the buyer who signs in silence, is rectified. No shared intention is needed. What founds relief is the knowing silence.

Now the two money remedies against a fiduciary, and they answer different questions. Equitable compensation repairs a loss, so it presupposes one. The claimant must show the breach caused it, on a but-for test. No loss, nothing to compensate.

An account of profits looks instead at the defendant's gain. It is available whether or not the claimant lost anything, because its purpose is to make sure a fiduciary keeps no benefit obtained through his position.

Boardman v Phipps is the anchor. A solicitor acting for a trust used information and an opportunity that came to him through that role to buy shares on his own account. He acted honestly. The trust did well out of the same opportunity. The House of Lords still held him liable to account for the whole of his personal profit.

Two things follow. Good faith is no answer, because the no-profit rule is prophylactic. And a benefit to the trust does not license a personal profit. The court may allow him a generous sum for his work and skill, but that is an allowance against the account, not a right to keep the gain.

Then the proprietary remedy, and this is where our bankrupt trustee comes back. A personal claim makes the beneficiary one unsecured creditor among many, sharing whatever the estate can pay. A proprietary claim asserts ownership of a particular asset.

So a trustee who takes £100,000 and buys a flat with all of it, now worth £150,000, holds that flat on constructive trust. It never forms part of the fund available to the general creditors. And the beneficiary takes it as it stands, gain and all.

The equitable defences. Laches: unreasonable delay that prejudices the defendant. No fixed period. Nine years of silence while the witnesses die and the records are destroyed is the picture of it.

Acquiescence is close but different. The claimant stands by, knowing her rights, while the defendant acts to his detriment in reliance on her silence. Encouragement is not needed. Knowing silence is enough. And change of position protects a defendant who acted in good faith.

Now a trap worth a mark on its own. A builder did defective work five years ago. The claim is for damages only, well inside the six-year limitation period. Can he plead laches?

No. Equitable defences answer claims for equitable relief. They have no application to a common law claim for damages, which the statutory periods govern instead. Section 36 of the Limitation Act 1980 says so. If the question asks about damages, laches and clean hands are irrelevant.

Which brings us to tracing, and the first thing to say is that it is not a remedy and not a cause of action. It is a process of identifying property. You still need a claim: breach of trust, breach of fiduciary duty, unjust enrichment. Tracing tells you what to claim over.

And distinguish it from following. Following is pursuing the same asset from hand to hand. A trustee gives away a clock, and the clock is still on his brother's mantelpiece: you follow it. Tracing is pursuing value into a substitute. A painting is sold and the money buys a motorcycle: you trace.

Tracing needs a fiduciary relationship or a breach of trust, and an existing equitable interest. It does not create rights. It identifies property in which you already have one.

Now the mixed account, and four rules. Start with Re Hallett's Estate. Where a trustee mixes trust money with his own, he is presumed to spend his own money first, because he is presumed to act honestly. So the trust money is treated as staying in the account as long as possible, which favours the beneficiary.

But the claim is capped. Under the lowest intermediate balance rule, the beneficiary can trace no more than the lowest balance the account reached after the mixing. Money that has gone is gone. A later payment in of the trustee's own money does not replenish the trust fund.

Which answers the account we opened with. It fell to £15,000. That is the ceiling, whatever the balance says today, because the £25,000 of salary was his own money and restored nothing. For the other £5,000 the beneficiary is left with a personal claim in the bankruptcy.

Second, Re Oatway. Suppose the trustee uses the mixed fund to buy an asset that survives, and dissipates the rest. He does not get to say the surviving asset was bought with his money. The beneficiary may claim a first charge over it, attributing the survivor to the trust and the dissipated money to the trustee.

Third, Foskett v McKeown. £40,000 of trust money and £60,000 of the trustee's own buy a single parcel of shares, now worth £150,000. What does the beneficiary get?

Two-fifths. £60,000 of the present value. Where a mixed fund buys an identifiable asset the beneficiary may claim a proportionate share. He takes the benefit of the rise, because he asserts ownership of part of the asset. His alternative is a lien for the £40,000, which he would want only if the shares had fallen.

Fourth, Clayton's Case, and note when it applies. Not between a trustee and a beneficiary. Between two or more innocent claimants whose money is mixed in one active current account. The default is first in, first out. The first payment in is treated as the first paid out.

But it is only a rule of convenience, and it is readily displaced. Between hundreds of equally innocent investors in a collapsed fund it produces arbitrary results. The Court of Appeal has preferred a rateable share, in proportion to what each put in.

One defence beats all of it. The bona fide purchaser for value without notice. Equity's darling. Good faith, value of real substance so a donee cannot rely on it, and no notice, whether actual, constructive or imputed. Make all three out and the equitable interest cannot be asserted against you.

A word on how this is tested. SQE1 will not ask you to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. So learn what the rules do. The names are pegs to hang them on.

If you keep only three. American Cyanamid, because the interim test is a serious question, then adequacy of damages, then the balance of convenience. Re Hallett and Re Oatway together, because one presumes the trustee spent his own money first and the other lets you claim the surviving asset. And Foskett v McKeown, for the proportionate share.

Four traps. One: tracing is not a claim. It is a process for identifying property, and it proves nothing on its own. You still have to say what your cause of action is and what right you assert over the asset you have found.

Two: rectification does not rewrite the bargain. It corrects a document that fails to record what was actually agreed. If the document says what the parties agreed, the fact that one of them now regrets it is not a ground for anything.

Three: you must elect between equitable compensation and an account of profits. You cannot have both for the same breach. Take whichever is larger, and you need not choose until judgment.

Four: clean hands is not a character reference. The misconduct has to bear an immediate and necessary relation to the equity sued for. A claimant who lied to induce the very contract he asks the court to enforce is out. A claimant who is unpleasant in unrelated ways is not.

Quick check. A trustee is asked to find a buyer for a parcel of trust land. He arranges a sale to a developer at full market price, so the trust receives everything the land was worth and is no worse off. What the beneficiaries have since discovered is that the developer also paid him £40,000 for steering the sale his way. He says the trust has lost nothing, so there is nothing to compensate.

Three candidate answers. One: equitable compensation, because his breach of duty must be made good. Two: nothing, because the trust is no worse off than it should be. Three: an account of profits, the gain being recoverable although nothing was lost. Pause here if you want a moment.

The answer is three. The two remedies answer different questions. Compensation repairs a loss and so presupposes one. Here there is none, because the land fetched its full value, so compensation would be worth nothing. An account looks instead at the defendant's gain.

And it does not depend on loss. Its purpose is to make sure a fiduciary keeps no benefit obtained through his position. The £40,000 came to him only because he was placed to steer the sale, so he accounts for it to the trust. He is right that the trust lost nothing. He is wrong that it follows there is nothing to pay.

Five things to take away. One: equitable remedies are discretionary, and the court weighs conduct, hardship, delay and the adequacy of damages before granting one. Two: specific performance for land, never for personal services, and never where it would need constant supervision.

Three: compensation repairs a loss, an account strips a gain, and you elect between them. Four: tracing identifies property, it does not create a claim. Five: in a mixed account the trustee is presumed to spend his own money first, but you can never trace above the lowest intermediate balance. Which is why our bankrupt trustee's beneficiary gets £15,000 and not £40,000. That is the end of Trusts Law. Next time, a new subject: Wills and Administration of Estates.

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