The rule in Clayton's case revisited.

The Rule in Clayton’s Case1. Introduction 2. Tracing [2.1] At Common Law [2.2] In Equity 3. Mixed Funds and the ‘Rule in Clayton’s Case’ [3.1] How the Rule operates 4. When it doesn't operate: Exceptions [4.2] Rebutting the Presumption [4.3] Facts rendering FIFO unjust or inapplicable [4.4] Impossibility or impracticality 5. Other Jurisdictions: a Comparative Analysis [5.1] Canada [5.2] The US [5.3] Australia & New Zealand 6. Continued Development 7. Conclusion 8. Bibliography 1. Introduction The rule in ‘Clayton's Case has never been a rule without exception.’ 1It effectively applies a ‘f irst in first out’ rationale in situations where the owner’s funds are commingled with others and rendered indistinguishable. As we shall see the courts of equity have been pragmatic in their approach to redistributing loss despite the lingering affliction of anachronistic precedent. This essay will offer a critique of the prevailing approaches in the common law world and venture some idea’s as to where it might be headed. 2. Tracing When the property of an individual is misappropriated the law may allow them to trace it into the hands of another. 2 This is an action in rem 3 rather than in personam; proprietary in nature rather than restitutional. 4 Tracing serves to complement a claim by revealing the route of the misappropriated property, thereby allowing for its value 5 to be identif ied in its original or converted form.6 It has the advantage of overcoming bankruptcy or limitation periods since it is an assertion of ownership, it awards interest from the date of acquisition by the defendant, and it is cognisant of any subsequent increase in value. 7 However the extent to which the deprived party may reach into the property of another heavily depends on the type of interest forming the subject of the trace. The Courts have traditionally distinguished between tracing in common law and in equity. 2.1 At Common Law The common law approach developed from traditional rules governing commerce and chattels.8 In this regard the doctrine has somewhat stagnated since ‘the common law could only appreciate what might be called the “physical” identity of one thing with another’. 9 It is thus limited to pursuing property once its identity is still discernible even if converted, 10 e.g. 1 Martin J, ‘Tracing, fraud and ultra vires’ [1993] Conv 370 at 373 2 Delany H, Equity and the Law of Trusts in Ireland (5th Ed, Round Hall, 2011) p 809 3 Generating an interest or right in the specif ic property which is prima facie binding on the whole world 4 As shown in Foskett v McKeown [2001] 1 AC 102 HL at 110 where inter alia the respondents had cross appealed on the basis that the appellant beneficiaries had already availed of certain remedies. The HL unanimously rejected this on the basis that the claim to trace was proprietary and therefore they were “two wholly unrelated remedies”. 5 Value in this sense refers to the quantif iable value of the interest attached to the subject property. As Millet LJ stated in Foskett v McKeown [2001] AC 102 at 128 “What he traces, therefore, is not the physical asset itself but the value inherent in it.” 6 Evans S, ‘Rethinking tracing and the law of restitution’ [1999] 115 LQR 469 at 470 7 Ramjohn M, Cases and Materials on Trusts (3rd Ed, Cavendish 2008) p 603-604 8 See the Common Law Procedure Act 1854, s.78, allowing recovery of specif ic chattels under detinue actions. The very nature of a pre modern monetary system relied on physical possession as shown in Core's Case (1537) 1 Dyer 20a, 22b 9 Re Diplock [1948] Ch 465. See also Goff LJ Lipkin Gorman (A Firm) v Karpnale Ltd [1991] 2 A.C. 548 in referring obiter that a chose in action in relation to a bank draft would be property traceable at common law at 573-574 10 Delany H n73 p 809, Hanbury & Martin J, Modern Equity (17th Ed Sweet & Maxwell 2005) p 684. This is aptly summarised by Lord Ellenborough C.J. in Taylor v. Plumer (1815) 105 E.R. 721 at 726 “It makes no dif- . as long as it can be ascertained to be such. 15 [2001] AC 102 16 ibid at 128.g. See also Tang Hang Wu ‘Foskett v McKeown Hard-Nosed Property Rights or Unjust Enrichment’ [2001] 25 1 MULR 295 regarding a unitary approach to tracing 17 See the Canadian case of B. This was first recognised in Pennell v Deffell (1853) 43 ER 551 which effectively restated the law regarding beneficiaries tracing into mixed funds. mixed or unmixed..a process of identifying assets: it belongs to the realm of evidence. 18 Re Hallett’s Estate (1880) 13 Ch D 696 at 709 19 Agip (Africa) v Jackson [1990] Ch..’ and in his view ‘the present rule which precludes the invocation of the equitable tracing rules to support a common law claim. different from the original. Pearsons 2009) p 448.’ 13 Recently there has been some judicial relaxation toward the strict common law approach to tracing.M. the continued existence is applied in a practical and flexible manner and substitution is far easier in comparison.’ Similarly Millet LJ also remarks that ‘there is nothing inherently legal or equitable about the tracing exercise’ at 170.Trusts and Equity (9th Ed. and the right only ceases when the means of ascertainment fail. This is cruference in reason or law into what other form.14 In Foskett v McKeown15 Millet LJ obiter criticised the dichotomy between legal and equitable tracing.Tracing into unmixed bank accounts that are in credit..11 Where profits are derived from the property. V Bank of Nova Scotia [2009] SCC 15 where the court allowed tracing after property held in law.17 2. E. 18 An owner of an equitable interest may pursue a proprietary remedy in the ‘continued existence of the trust property in the hands of a defendant’.” See Smith L. the courts will also allow the legal owner to claim them.. such that it is ‘in truth. The UK Court of appeal was emphatic that the mere mixing of funds was no bar to substitution under tracing. the change may have been made. for the product of or substitute for the original thing still follows the nature of the thing itself.. equity … could do nothing.”16 where the crux of the action was simply whether a fiduciary relationship existed.. In FC Jones and Sons (Trustees) v Jones12 the legal owner was entitled to trace into ‘property representing the original and the profit made by the defendant's use of it.. Agip (Africa) v Jackson [1990] Ch. 11 Banque Belge pour l’Etranger v Hambrouk [1921] 1 KB 321. 21 Re Diplock [1948] Ch 465 at 521 Lord Greene MR 22 (1880) 13 Ch 696 . 265 at 285 12 [1997] Ch 159 13 ibid at 172 14 ibid Millet LJ at 169-270 ‘tracing is neither a right nor a remedy but merely the process by which the plaintiff establishes what has happened to his property and makes good his claim.. It tells us nothing about legal or equitable rights to the assets traced.... ‘Tracing in Taylor v Plumer: equity in the Court of King’s Bench’ [1995] LMCLQ 240.20 It is vital however that this continued beneficial interest is maintained in some converted form. Steyn LJ at 113 makes critical remarks about the nature of tracing. 265 Millet J at 290 20 Stockwell N & Edwards R. is spent upon a dinner. In Re Hallett’s Estate22 a solicitor misappropriated client funds into his personal bank account and subsequently went bankrupt. observing that it is prone to “capricious results in cases of mixed substitutions. 19 In contrast to common law tracing.2 In Equity The remedy of tracing is available in equity to the principle in a fiduciary relationship. otherwise if the ‘fund.’ 21 The most common situation where equitable tracing will arise is where trustees misuse trust property.’ was unsatisfactory.P. Global Distribution Inc.. some equitable proprietary interest has been created and attaches to the property in the hands of the volunteer. 28 However a fiduciary relationship alone may be insufficient. express or constructive. 669 at 714 ..”27 It follows then that once the fiduciary relationship is established with the principle. 24 Fiduciary relationships generally give rise to sufficient equitable interest to trace as witnessed in Sinclair v Brougham 25. 324 31 [1979] Ch 105 32ibid at 119 33 [1986] ILRM 518 34 Chase Manhattan Bank v Israel-British Bank [1979] Ch 105 35 [1914] AC 398 36 [1996] A. as a result of what has gone before. “Equity may operate on the conscience not merely of those who acquire a legal title in breach of some trust.30 The courts have generally taken a flexible approach to establishing a fiduciary relationship between the owner and original recipient. 453 30 ibid at 492 per Neuberger LJ MR ‘that if a proprietary claim is to be made good by tracing. or of some other fiduciary obligation.’ This departs from the ruling by the privy council in Attorney General of Hong Kong v Reid [1994] 1 A..now be available both for common law and equity proceedings’. there must be a clear link between the claimant's funds and the asset or money into which he seeks to trace. walk in and examine the books’. In Chase Manhattan Bank v Israel-British Bank31 a duplicate lodgement was held to give rise to an equitable interest under a fiduciary relationship by the mere fact of mistake. In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) 29 the court held that a proprietary remedy would only be available if there was a proprietary connection between the property sought and the trustees.32 This decision was endorsed in Ireland in Re Irish Shipping Ltd 33 on somewhat similar facts. but of volunteers provided that. 26 [1948] Ch 465 27 ibid at 530 28 Agip (Africa) v Jackson [1990] Ch 265 29 [2012] Ch. Interestingly the learned Judge also held the opinion that tracing ‘should. 25 [1914] AC 398 at 540 (overruled) The House of Lords held that a fiduciary relationship between depositors of a ultra vires banking scheme and the directors of the building society gave rise to a sufficient equitable interest due the legal impossibility of the intended purpose.cial in relation to tracing into mixed funds. This principle was confirmed in Re Diplock 26 where the UK CA held that. as Atkin LJ in Banque Belge pour l’Etranger v Hambrouk 23 proclaimed. there is no need for such a relationship with subsequent recipients of the property.C. 23 [1921] 1 KB 321 24 ibid at 335. by 1879 equity had had the courage to lift the latch.C. ‘But if in 1815 the common law halted outside the bankers' door. However this requirement has come under scrutiny and both Chase34 and Sinclair v Brougham35 have been departed from by the court in Westdeutsche Landesbank v Islington London Borough Council 36. Mixed Funds and the ‘Rule in Clayton’s Case The defining feature of equity is its’s ability to trace into mixed funds and allow beneficiaries49 to recover the trust property. The effect of the rule is to prevent an proprietary interest extending to property acquired after the interest comes into being. the right to trace can be applied to property which has subsequently come into the hands of an innocent volunteer.Curiously however.’ 47 ibid at 132 48 [1948] Ch 465 at 539 49 Herein using beneficiary to refer also to principals in a fiduciary relationship 50 [1915] 1 Ch 62 51 See O’Dell E. 42 [2001] AC 102.’45 However the courts will not allow tracing into the hands of a bona fide purchaser for value without notice. Although it is still required. Browne-Wilkinson LJ37 maintained that the principles of Re Diplock 38 stand. See the criticisms of Breslin J. (1994) n41 44 [1948] Ch 465 45 ibid at 539 See also Foskett v McKeown [2001] 1 AC 102 at 132 where Millet LJ Comments on innocent contributors ranking equally. .41 Moreover it has been mentioned above that Millet LJ in Foskett v McKeown42 has criticised the rationale of the fiduciary requirement. The reasoning behind this appears to concern the inequity of denying ‘trade creditors in competition’39 upon winding up. ‘The use and abuse of Clayton's case’ [2000] 22 DULJ 161 at p 172 52 Bishopgate Investment Management Ltd v Horman [1995] Ch 211 and Re Goldcorp Exchange [1995] 1 AC 74. ‘Tracing into an overdrawn bank account: when does money cease to exist?’ [1995] 16(10) Comp law 307 at p 310-313 in relation to the way the courts view an overdraft as a financial abyss. it appears that the conscience of the court would probably encourage a flexible approach to establishing the relationship. In Re Diplock 44 the Court held that once the voluntary acquisition is bona fide. This may suggest that the broad unconsionability approach40 is indirectly eroding the fiduciary requirement. and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice. 3. 52 37 ibid 38 [1948] Ch 465 39 Westdeutsche [1996] A. 43 Once the relationship exists. ‘Tracing into vanishing Assets: high Expectations and Equitable Remedies’ [1994] 1 Comm LP 211 at 214 identif ies that Goulding J in Chase preferred the US Court of appeal decision in Re Berry 147 F208 (1906) which itself referred to the conscience of the court.C. the owner and volunteer will share ‘pari passu. He persuasively argues that the banks position in providing the credit is not undermined by tracing into the fund. This is subject to the ‘lowest intermediate balance rule’ demonstrated in James roscoe (Bolton) Ltd v Winder50. 46 Foskett [2001] 1 AC 102 at 127 ‘A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also.51 This has been extended to exclude ‘tracing backward’ through debts since the property id deemed to be dissipated/non-existent. 669 at 713 40 See dicta of Cooke P in Elders Pastoral Ltd v Bank of New Zealand [1989] 2 NZLR 180 41 It is interesting to note that Collins M.46 Millet LJ in Foskett47 also reiterated the ratio of Diplock48 innocent volunteers or contributors to a mixed fund rank pari passu upon allocation. see above and n16 and 17 43 Collins M. 453 55 Re Hughs [1970] IR 237 56 (1816) 1 Mer 572.61 Its initial incarnation was ‘derived from the very nature of the banker-customer relationship in a current account.. here is appropriation in the only way that the nature of the thing admits.. In the first scenario equity will generally presume that the trustee was acting honestly to preserve the beneficiaries interest. this debt is extinguished. so placed in opposition to debts. 55 Finally. 57 Herein referred to as FIFO 58 FIFO was subsequently met with approval in the day by the court in Bodenham v Purchas (1818) 106 ER 281 at 284 59 ibid at 610 60 Deeley v Lloyds Bank [1912] AC 756 at 785 per Shaw LJ describing it as a rule ‘universally known and accepted in the banking world. Here are payments. 3.’ 59 It was originally recognised as standard feature of banking law practice. ‘If appropriation be required. 63 The application of the rule to competing beneficiaries was first recognised in Pennell v Deffell 64 and confirmed in Re 53 Re Hallett’s Estate (1880) 13 Ch 696 54 Note that this is partially overruled by Foskett v McKeown [2001] AC 102 where the trust funds are used in conjunction with personal funds to purchase an asset the beneficiary will only able to assert a proportional ownership. and c) a third party has received the trust funds and mixed it with their own.’ See also ANZ v Westpac (188) 164 CLR 662 at 676 ‘the ordinary rule of appropriation. that.’ 61 In Re Diplock [1948] Ch 465 at 555 ‘We see no justif ication for extending that rule beyond the case of a banking account.’ This affirms the earlier decision of The Mecca [1897] AC 286 at 290–291 62 Re Ontario Securities Commission and Greymac Credit Corp (1985) 19 DLR (4th) 470 at 491 63 Ramjohn M n7 p626 64 (1853) 43 ER 551. but could only do so if the balance sought existed prior to his death.1 How the Rule operates The rule in clayton’s case was set out in Devaynes v. relating to the mixing of trust and personal funds by a trustee. on the ordinary principles on which accounts are settled. and stipulates that any withdrawals(debits) from an account of mixed funds are construed as withdrawals of the earliest lodgements(credits): first in first out. Noble 56.The courts of equity employ a number of doctrines to determine how mixed funds are to be redistributed.’ 62 It has since extended into the ascertainment of interests under trust or fiduciary arrangements. Also acknowledged in Hancock v Smith (1889) 41 Ch 456. this was referred to by Wolfe LJ in Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 . The plaintiff failed to recover since he was deemed to have withdrawn the funds under the first in first out rule. This appears to be congruent with the proprietary requirement/connection in Sinclair [2012] Ch. 60 and it applies only to current accounts.57 The net effect is a chronological order offsetting lodgements and withdrawals. b) the trustee has mixed the trust fund with other trust funds.. the Rule in Clayton’s case becomes a factor. These extend to situations where a) the trustee has mixed his own funds and the trust fund.58 As Grant MR states..53 Thus any withdrawal of the funds will be borne by the trustee first and the remainder will satisfy the beneficiaries interest54and similarly subsequent deposits to a depleted trust funds will be presumed to replenish the fund. The facts were that the plaintiff traced and sought to recover money from the estate of a deceased partner. in the latter two scenarios above. Notwithstanding this the courts have demonstrated reluctance to strictly apply the rule to the extent where it has been sidestepped.’82 65 (1880) 13 Ch D 696 although it restated the rule regarding the mixing of trust and personal funds by a trustee. 317 74 (1880) 13 Ch D 696 75 ibid at 738 per Baggally LJ and Jessel MR at 728 76 [1914] 1 IR 180 77 [1985] IR 756 at 765-766. 237 at 242 68 Re Ararimu Holdings [1989] 3 NZLR 487 at 498 69 Deeley v Lloyds Bank [1912] AC 756 Per Atkin LJ at 771 “It is no doubt quite true that the rule.is not a rule of law to be applied in every case. and Smith v Betty73 have affirmed this flexible approach. 669 81 [1992] 4 All ER 22..B.80 Similarly the CA in Barlow Clowes International Ltd v Vaughan81 Wolfe LJ stated that ‘[t]he rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of the competing claims.R.” 70 (1874) LR 9 CP 692 71 (1843) 4 Q. In re Hughes [1970] I. 442. Vaughan [1992] 4 All E.67 and elsewhere. e. The Mecca72. This view of the rule was endorsed in Ireland in Re Chutes Estate76. but rather a presumption of fact.280-285 of the Companies Acts 1963 79 [1948] Ch 465 80 ibid at 554. by evidence going to shew [sic] that it was not the intention of the parties that it should be applied.. In Re Hallett’s Estate74 the court indicated that the rule was a presumption rebuttable by an ‘expressed intention to the contrary. This has subsequently been approved in both the UK. Baggally LJ at 738 recognised the application to competing beneficial interests. It has since been overruled in Westdeutsche Landesbank v Islington London Borough Council [1996] A. and has since been successfully applied in and in Station Motors v AIB 77 in relation to subrogation for fraudulent preference. and that this presumption may be rebutted in any case. See also In re Daniel Murphy [1964] IR 1 78 See s. Barlow Clowes International Ltd (in liq) v.69 Subsequent decisions such as City Discount Co.g.Hallett’s Estate65. 792 72 [1897] AC 286 73 [1903] 2 K. 66 Ireland.. v McLean70... B. 22 67 Shanahan’s Stamp Auctions v Farrelly [1962] IR 386. 66 Wood v Stenning [1895] 2 ch 433 at 436. In Sinclair v Brougham [1914] AC 398 the court applied Hallet’s rule to an ostensibly clayton’s case. official transcript 82 ibid official transcript .’75.. Henniker v Wigg71. 78 The seminal case of Re Diplock 79 confirmed that the rule continues to operate as a ‘convenience based on so-called presumed intention’.C.68 In practise this rule has served to presume the intentions of the parties in the absence of evidence to the contrary.R. . This is typically stated in loan agreements subject to the s. Increasingly the courts have taken to displacing the presumption upon investigation of what the intentions of the parties might actually be. 4. December 3... rather than the rule in.’ 85 There are a number of factors which mitigate against the operation of the rule.44 of the Consumer Credit Act 1994 88 An early example is Henniker v Wigg (1843) 4 QB 792 89 (1884) 25 Ch 692. When it doesn't Operate: Exception The UK and Irish approach to FIFO is fairly described to be displaced by “even a slight counter-weight. cause it to be inequitable. (source com law text book) 91 [1948] Ch 465 92 ibid at 467 93 unreported.2 Rebutting the Presumption A corollary of a presumption is that it may be displaced. 87 Donnelly M. ‘The modern approach in England has generally not been to challenge the binding nature of the rule but rather to permit it to be distinguished by the reference to the facts of the particular case. and in the circumstances of the case may displace the presumption. 86 These are largely not mutually exclusive.’ 94 thereby rebutting the presumption. Clayton's case.4. HC. 2001 94 ibid Transcript 95 In Re Eastern Capital Futures Limited (1988) 5 BCLC 223 at 371 Morritt J was dissatisfied with applying the rule where it would be impossible to discover the presumed intentions of the parties. 87 This has occurred in a number of cases where the courts are satisfied that the beneficiary held a contrary intention.154.”83 As Lindsay J in Russell-Cooke Trust Co v Prentis 84 stated..88 An example of this is demonstrated by In Re Sherry 89 where the creation of a separate account was sufficient rebuttal. 95 This can also be seen in the approach of Woolf LJ and Leggatt LJ in Barlow Clowes International Ltd v Vaughan 96 where the UK CA did not apply the FIFO rule in relation to the misapplication of investment 83 ibid at para 55 Lindsay J.92 In Sheppard v Thompson93 the defendant received contributions on the ‘express basis. 96 Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 CA . or even render its application wholly impractical. The Law of Credit and Security (Roundhall 2011) p 237 para 7. For an Irish example see In re Danial Murphy [1964] IR 1 90 Unlikely that a continuing security such as a bond or guarantee would be stopped by another account. referring to Dillon LJ in Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 CA 84 [2003] 2 All ER 478 85 ibid at para 55 86 Notwithstanding the aforementioned rules surrounding the right to trace above. 90 In Re Diplock 91 the presumption was rebutted were trust funds withdrawn were designated and placed into a separate account by the innocent volunteer.[so] it might be more accurate to refer to the exception that is. The most common example is where this occurs is where the creditor or debtor retains a right of appropriation. 3 Facts rendering FIFO unjust or inapplicable: indirectly rebutting the presumption. Schmidt & Co. thereby rebutting the presumption of the FIFO rule. In Re British Red Cross Balkan Fund 102 the surplus of a fund for the wounded of the Balkan war was redistributed rateably since the circumstances of the case did not ‘afford ground for inferring that the transactions of the parties were not intended to come under the general rule. This approach was followed in Russell-Cooke Trust Co v Prentis 108 and evinces a more common sense 97 ibid The Funds were used to by gilts and a yacht 98 (1880) 13 Ch 696 99 El Ajou v Dollar Land Holdings (No 2) [1995] 2 All ER 213 at 222. 100 In Barlow 101 the Court recognised a long line of authority which dealt with the winding-up of a non-charitable benevolent fund where the courts have deemed the application of FIFO to be be unsuitable to such cases. ‘The demise of the rule in Claytons case’ [2003] Conv 339 p 343 107 Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 CA 108 [2003] 2 All ER 478 . Mentioned below n141-143 101 [1992] 4 All ER 22 CA 102 [1914] 2 Ch 419 103 ibid Astbury J at 421 104 [1946] Ch 86 at 97 105 ibid 106 Pawlowski M.’103 This rationale becomes more evident in light of the decision of the court in Re Hobourn Aero Components Limited's Distress Fund 104. In Re Hallett’s Estate 98 ensures that trustees do not avail of the rule. Here the court declined to apply the rule since the beneficiaries were deemed to retain a proportionate interest in their contributions if they were not used for the intended purpose. Similarly the courts do not generally employ FIFO in cases concerning ‘victims of large scale fraud’. The courts will generally refuse to allow parties who’s conscience are bound to benefit from the FIFO rule. Commerzbank Aktiengesellschaft v IMB Morgan plc [2004] EWHC 2771 (Ch). Having reviewed the case law the court was satisfied that in schemes where investors knowingly contributed to a mixed fund under an a common investment they at all times retained an equitable interest in the portion.97 The court held inter alia that due to the nature of a common investment fund there was a presumed intention that they individually maintained a proportionate equitable interest in the fund. 4. The Law Lords chose to investigate the nature of the mixed fund and infer the intentions of the investors.funds. official transcript See also the recent Irish case Criminal Asset Bureau v Kelly (No. 100 See the seminal dictum of Hand J in Re Walter J.105 The ‘common theme’106 recognised in Barlow107 was the single purpose of the mixed fund and its misuse.99The Courts have generally been reluctant to apply the legal fiction of FIFO where it is deemed to be unjust or inapplicable.2) [2012] IEHC 595 discussed below. ex parte Feuerbach (1923) 298F 314 at 316. On this basis the court held that the funds were to be redistributed pari passu rateable to their share. Due to the costs involved they elected to distribute pari passu rateable to contributions. Many commentators have pointed out that this may be the most common remedy due to the relative ease of calculation. Holland J. the syndicated investors had a proprietary claim to the allocated stamps and the unsyndicated investors had a charge over the proceeds of the unallocated stamps. While Murphy J held that the ‘equities between the competing claimants to the account would seem to be equal’ at 20.3. . These syndicates were allotted collectors stamps which were to be auctioned and the proceeds realized to the subscribers.109 In Ireland Laffoy J Re Money Market International Stockbrokers Ltd 110 refused to apply the rule111 where funds were temporarily held by an intermediary who subsequently went into liquidation. Rev. In Barlow116 the court felt that to apply the FIFO rule would result in considerable expense to the fund.’ 112 and he should take free of any rateable distribution. 120 In terms of the distribution of the unallocated stamps bought from the mixed fund. It transpired that the scheme was bogus. Re W & R Murrogh 113 followed this decision and Barlow 114 .. 15 at 16 119 [1962] IR 386.. In the latter part of the judgement [2007] 4 IR 1 at 44 in relation to the Receiver in responding to submissions regarding special treatment under Re Money Market International Stockbrokers Ltd [1999] 4 IR 267 averred to several claimants who were more disadvantaged. 20.115 4. 118 In Shanahan’s Stamp Auctions Ltd v Farrelly119 Budd J held that the company as a fiduciary had dissipated its own money from the mixed fund first.6. ‘Managing competing claims claims on frozen accounts’ [2005] 24 Int'l Fin. L. Budd J held that while Clayton’s rule was applic- 109 In South Africa StandardBank of SA v Oneanate Investments (1998) (1) SA 811 (SCA) FIFO was held to be a presumption of fact which did not arise where the facts did not support it 110 [1999] IR 267 111 Or even the parri passu system 112 [1999] 4 IR 267 at 277 113 [2003] 5 JIC 0603 114 Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 CA 115 [2003] 5 JIC 0603 at 20. in so doing the court held that it would be inappropriate to apply FIFO.4 Impossibility or impracticality Where commingled trust funds have undergone a number of conversions or mixtures the courts may be unable to disentangle the complex mass of transactions to determine the chronology of credits and/or debits.7 116 ibid 117 Discussed below under ‘Canada’ in relation to Re Ontario Securities Commission and Greymac Credit Corp (1986) 55 OR (2d) 673 118 O’Dell n51 p170. Cf from Re Registered Securities [1991] 1 NZLR 545 where the records were sufficient but applied via Rolling Charge 120 ibid a company held funds under an investment stamp scheme grouped investors into syndicates. They considered an alternative method of distribution known as a ‘Rolling Charge’ 117.approach to displacing the rule where there are no facts grounding the FIFO presumption. In her view the equity of the other creditors over the mixed fund was surpassed by that of the applicant due to the ‘particular circumstance[s]. Murphy J held that the resulting injustice by favouring the latter creditors in a mixed pool should be avoided by a rateable distribution. 126 The court held that the funds were distributable on a rateable basis to the proportionate contributions. thus to employ FIFO ‘both impractical and unjust’. These are prohibited under s.125 Due to the nature of correspondent accounts determining the correct allocation of funds would be nearly impossible. a pro rata basis was more suitable since the chronology of the purchase of the stamps was indeterminable. 129 The CA approving. In the aforementioned case the ‘lowest intermediate balance’ 134 rule was seen as a veiled attempt to use FIFO. Canadian style: Re Graphicshoppe and other recent cases’ [2006 ] 43 Can. 131 [2005] BCJ No 1205 (QL).. notwithstanding they are wholly unrelated 121 ibid at 442 Therefore they could not be offset against the record of lodgements. official transcript 125 This was in relation to the infamous advance fee’s fraud emanating from Nigeria.’123 was fatal to the application of FIFO. Bus. ‘ In defence of the North American Rolling Charge’ [1997] 12 Denning LJ 43 at 50 129 (1985) 19 DLR (4th) 470 at 497-498 per Parker ACJHC 130 (1986) 30 DLR (4th) 1 (Ont CA) at 14-15 Subsequently approved by the Supreme Court on appeal. 292 at 300 133 (1999) 169 DLR (4th) 353 134 Mentioned previously at heading 3 ..J. 122 [2003] 2 All ER 478 123 ibid para 56 124 [2004] EWHC 2771 (Ch). From first instance the court refused to apply FIFO outside of a banker-customer context. 254 DLR (4th) 397 (CA) 132 ibid In this case in was the equitable interest vs the unsecured creditors.able. L. 419 of the Nigerian Criminal Code 126 [2004] EWHC 2771 (Ch).1 Canada In Canada Re Ontario Securities Commission and Greymac Credit Corp 127 has unequivocally eviscerated the application of FIFO to competing investors to a common fund. Duggan A.130 Subsequent cases such as In PortAlice Specialty CelluloseInc.121 Similarly in Russell-Cooke Trust Co v Prentis 122 the absence of a ‘strict temporal sequence. felt that the rule was based on erroneous precedent and highly arbitrary. Instead the court opted to impose the ‘Rolling Charge’ 128 which calculates the loss of each investor proportionately to their interest prior to the withdrawal. 5. official transcript para 49-50 127 (1985) 19 DLR (4th) 470 (1986) 30 DLR (4th) 1 (Ont CA) (1988) 52 DLR (4th) 767 (Sup Ct) 128 Lowrie S & Todd P. In Commerzbank Aktiengesellschaft v IMB Morgan plc 124 the court considered the FIFO rule in dispensing the remaining mixed funds to the victims of fraud. Furthermore it felt to subordinate one innocent beneficiaries interest to the other would result in injustice. (Trustee of) v ConocoPhillips Co131 have ruled that the FIFO rule will no longer apply to contests between innocent claimants. ‘Tracing. Other Jurisdictions: a Comparative Analysis 5.132 Unfortunately their righteous zeal resulted in some cacollateral damage and the Canadian courts in Law Society of Upper Canada v Toronto-Dominion Bank 133 appear to have mistaken the law. or at least it should be. 237. Re W & R Murrogh [2003] 5 JIC 0603. In re Hughes [1970] I. Non exhaustive list* 143 ibid at at p 316 144 Finkelstein M & Robbins H. resulting in considerable criticism of the decision as it appeared to needlessly complicate matters and cause an unjust expropriation of the latter contributors property. 442.R.J. See also O’Dell n51 p 174.I.140 5. ‘Tracing in bank accounts: the lowest intermediate balance rule on trial’ [2000] 33 Can. Shanahan’s Stamp Auctions v Farrelly [1962] IR 386. ‘A probabilistic approach to tracing in the law of restitution’ [1983-1984] 24 Jurimetrics J 65 at p 71 . To adopt it here is to apportion a common misfortune through a test which has no relation whatever to the justice of the case.142 ‘When the law adopts a fiction. Although the plaintiff maintained the bank should bear the loss of the dissipated amount in the accounts.135 Moreover the court declined to employ the ‘Rolling Charge’. ‘Good legal doctrine is not just about getting the right answer. Re Ontario Securities Commission and Greymac Credit Corp 470 (1986) 30 DLR (4th) 1 (Ont CA) Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22. for some purpose of justice. I submit with the utmost respect. it is. Furthermore both O’Dell and Smith L [2000] n135 p 87 also criticise the relative simplicity of the task both practically and in terms of the professionals tasked to carry it out (Liquidators etc) 137 [2009] SCC 15 138 The Plaintiff had pursued the bank for damages after it reversed credit from a fraudulent check which the plaintiff had received innocently.2 The US The dictum of Hand J in Re Walter J Schmidt & Co. Noble (1816) 1 Mer 572 140 Fox D M. RussellCooke Trust Co v Prentis [2003] 2 All ER 478. Re Money Market International Stockbrokers Ltd [1999] 4 IR 267. Commerzbank Aktiengesellschaft v IMB Morgan Plc and Others [2005] 2 All ER (Comm) 564. Re Registered Securities[1991] 1 NZLR 545.138 Remarkably the court endorsed the redistribution of money from the plaintiff’s accounts which imposed a dissipated portion of funds onto the plaintiff since their personal credit was present before the cheque proceeds. At p 83 This decision has been impugned for confusing the result with the means. Paul: A. …Such a result. 136 O’Dell n51 p 175 Since it ignores the practical realities and the ease at which the mixture of funds can be unmixed.136 BMP Global Distribution Inc v Bank of Nova Scotia 137 is a landmark decision from Canada in which the SC unanimously refused to bar a claim under common law tracing due to the mixing of funds. it is about getting the right answer for the right reasons. 75 at p 82.’ Additionally he argues at p 84 that the court took into account the intermediate balances in not allocating funds pari passu ex post facto.in substance. which carries the superseding authority of the SC . (2003) 204 ALR 353. This is ostensibly an unspoken common law tracing application of Clayton’s case139: FIFO. ‘Follow the Money’ [2010] 69(1) CLJ 28 141 (1923) 298 F 314 142 See Re French Caledonia Travel Service Pty Ltd[2003] NSWSC 1008.. can only come from a mechanical adherence to a rule which has no intelligible relation to the situation. Feuerbach141 has been cited in every major case concerning FIFO. Bus. 135 Smith L.’ 143 This was one of the primary driving influences behind the Provisions of the Restatement respecting tracing144 under the Restatement of the Law of Restitution (St.L. Its action failed since the defendant bank had a contractual basis for reversing the payment. ex p. L. 139 Devaynes v. Continued Development O’Dell points to the dicta of Brown-Wilkonson LJ regarding mixed funds when he states that ‘it is established law that the mixed fund belongs proportionately to those whose moneys were mixed’.153 Millet LJ went further to say that ‘where the fund is defi cient. is arguably unfair against the 145 LRC of British Columbia. 1983). the beneficiary is not entitled to enforce a lien for his contributions.1937). and the intentions of the beneficiaries.3 Australia & New Zealand The Australian courts have been considerably adverse to the application of FIFO. 156 However it seems that the current preferred method of distribution. See Finkelstein M & Robbins H n144 at p 71 146 (1994) 34 NSWLR 308 147 ibid at 358 Kearny J stated that the rule applied to the ‘banker and customer. §213. (2003) 204 ALR 353 150 [1991] 1 NZLR 545. therefore. all must share rateably in the fund’ 154 to the extent that ‘the primary rule in regard to a mixed fund. and held that beneficial interest did not arise and that the contributors would take parri passu. Re Securitibank [1978] 1 NZLR 97 at 174 151 (1923) 298 F 314 at 316 152 Re Registered Securities [1991] 1 NZLR 545 at 553 153 Foskett v McKeown [2001] 1 AC 102 HL at 109 154 ibid at 132 155 ibid 156 O’Dell n51 p 170 . 152 6. The Court rebuked FIFO as a fiction which must yield to the requirements of justice. 148 (1998) 44 NSWLR 451 149 [2003] NSWSC 1008. Report on competing rights to mingled property: Tracing and the rule in Clayton’s case (LRC 66. In Re French Caledonia Travel Service Pty Ltd149 Campbell J having reviewed the case law of FIFO felt the common law precedent was lacking. and has nothing to say as to the relationship of trustee and beneficiary’. In Hagan v. The prevailing approach now appears to favour a proportionate proprietary distribution. the pari passu system. is that gains and losses are borne by the contributors rateably’. 155 In light of the prevailing approach to tracing is submitted that the FIFO rule is quickly approaching retirement in favour of a more general and holistic approach to tracing in situations where there are innocent competing beneficiaries. Waterhouse146 The HC plainly refused to apply the rule outside of banker-customer relationships147 and this was subsequently met with approval by the CA in Keefe v The Law Society148.145 5. In New Zealand Re Registered Securities 150 the CA approved the dicta of Hand J in Re Walter151. the facts. g.2 and 3 of the Proceeds of Crime Act 1996 as amended. e. Here Clarke J held that the presence of a ‘clear nexus between a specif ic payment in and a specif ic payment out. See O’Dell n51 p 195-200 160 Re W & R Murrogh [2003] 5 JIC 0603 161 Re Money Market International Stockbrokers Ltd [1999] 4 IR 267 162 See O’Dell n51 p 195-200 163 Delany n73 p 823 164 [2011] IEHC 5 165 ibid para 4. in Money Markets and recognised the superior equitable claims of the Donegal investors’.. Although it is acknowledged that it may not be suitable in some circumstances. The case concerned assets seized from a ‘ponzy’ scheme and held under s.4 Notwithstanding this the court held that the recipient was a bona fide purchaser for value without notice so the property could not be claimed. 166 ibid para 5-5. Feeney J obiter168 stated that had the case been decided on equitable grounds he would have followed Laffoy J in Money Market 169 since the first investors had a ‘greater equity’.170He distinguishes the facts of the case from Murrogh171 on the basis that the pari passu application was applicable to mixed pool scenarios.158 So far the Irish courts have refrained from completely ousting FIFO 159 and moreover there has been little impetus to deploy the ‘Rolling Charge’.later contributors. 157 Lowrie S & Todd P n128 [1997] at 45 referring to the judgement of DIllon LJ in Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 CA at 32 158 Lowrie S & Todd P n128 [1997] at 53-54 since it requires the whole history. See Re Money Market International Stockbrokers Ltd [1999] 4 IR 267 at 277 170 ibid para 20 171 Re W & R Murrogh [2003] 5 JIC 0603 .. 167 [2012] IEHC 595 168 ibid having determined the matter on the grounds that unmixed funds that were clearly identif iable could be easily traced at common law 169 ibid at para 21 ‘I would have followed the reasoning of Laffoy J.6. doubt has been cast over it by the decision in Headstart Global Funds Ltd v Citco Bank of NV and Ors164. even though it may never be the least costly.2)167 has potentially opened the door to a more flexible version of parri passu instead of FIFO. 160 The decision in Re Money Market 161 has been seen as falling short of applying it.’ 165 would attract FIFO. Thus there appears to be some hope of judicial reform on the horizon.162 While this has been heralded as a positive step toward consistent fairness in multibeneficiary disputes 163. instead opting for an exceptional exemption.166 The recent decision of Criminal Asset Bureau v Kelly (No.157 It is suggested that the ‘Rolling Charge’ would probably be the most commonly equitable method. Common funds (Barlow) or fraud (El Ajou) 159 Re Money Market International Stockbrokers Ltd [1999] 4 IR 267. or against assets transferred out of the fund in breach of trust. For Australia see Hagan v.’172 As Pawalski puts it. For Canada see Re Ontario Securities Commission and Greymac Credit Corp (1985) 19 DLR (4th) 470 at 498. at 13-15 and Smith L [2000 ] n135 p 78 . See also s. or against assets purchased using money from the trust fund. 139 of the Financial Services and Markets Act 2000 (“the 2000 Act”) empowering the FSA to create CASS 7 175 See Breslin J n52 at 308 E. Conclusion ‘The rule exists as a rough and ready solution.’173Increasingly the rule has been displaced in favour of more modern approaches.179 FIFO strongly appears out of place in a trust relationships180 since the owner may elect from multiple courses of action in Rem under a charge. an ‘account’ is merely a record of this. the outcome to which depends on a matter of chance. although once seen as a convenient basis for allocation of payments between competing contestants.’ See also LRC of British Columbia.. 175 If the prevailing UK jurisprudence continues its current trajectory 176 then Clayton's rule may apply to tracing at claims at common law. (1986) 30 DLR (4th) 1.183 Accordingly Millet’s LJ approach in to the nature of accounts as a ‘uniform mixture of value.178 It is suggested that the FIFO rule has been over extended and ought to be retracted to the ‘banker-customer’ context. Waterhouse(1994) 34 NSWLR 308 at 358 180 Conaglen M [2005] n58 p 47 181 Ibid a charge being notional they may have ‘a right to elect at the time of trial whether to claim against the trust fund. 174 In the UK and Ireland the present the common law position in relation to tracing is arguably untenable since in modern financial transactions money is mixed within the system. except when the rules provide to the contrary.g Clearing houses and the very nature of the customer relationship to a bank: the bank holds all of the money in one pool for its own use. [2003] NSWSC 1008. Rule 6.1 of the Solicitors Regulation Authority Accounts Rules 2011 provides that client money must without delay be paid into a client account.’ The Author refers to the persuasive dicta of Campbell J in Re French Caledonia Travel Service Pty Ltd. ‘Canada’ 178 O’Dell n51 p169 179 ibid see also Budd J in Shanahan’s Stamp Auctions Ltd v Farrelly [1962] IR 386 at 442 concern that the rule may ‘not apply beyond the tracing in a bank account and the principle may have no application to property acquired by means of a mixed fund. 172 M Ramjohn n7 p 626 173 Pawlowski M n106 p 345 174 14. is now viewed as anomalous and irrational. 1983) p 31-32 183 Breslin J [1995] n52 p308 184 Society for Advanced Legal Studies.1(b) of the Law Society of Scotland Practice Rules 2011 contains a provision to the same effect. Report on competing rights to mingled property: Tracing and the rule in Clayton’s case (LRC 66. 176 See generally ‘At Comon Law’ above 177 See ‘Other Jurisdictions’.’184 is far more preferable to the Clayton fiction.7. In situations outside of the banker-customer relationship the order of fictional withdrawals is irrelevant. 1983) p 31-32. ‘priority in time.1(b) states that “without delay” normally means on the same day.3..177 We submit that the FIFO rule is wholly unsuited to innocent ‘competing contributors’ of beneficial interest. 182 (LRC 66. ‘Forfeiture of terrorist property and tracing: sub-group 4: impact of the initiatives on other areas of the law’ [2003] 6(3) JMLC 261 p 266-267 referring to Foskett v McKeown [2001] 1 AC 102 at 127-128 . (2003) 204 ALR 353 .181 Moreover it is a legal fiction which ‘operated well only in particular fact patterns’:182 since money deposited with a bank is creates a debt. In a preemptive capacity some UK statutes have avoided FIFO by providing for funds held in a fiduciary capacity to by earmarked or held separately.. The Law Society of Scotland's guidance to rule 6.3.. the advent of computers is likely to mitigate the cost of the ‘Rolling Charge’. See also Smith L [2000] n135 p 87 regarding the relative ease of data manipulation with a ‘simple program.Currently FIFO will apply where the equally innocent beneficiaries successfully trace into a current account. ‘Contest between rival trust beneficiaries’ [2005] 64(1) CLJ 45 at p 64 186 Re Ontario Securities Commission and Greymac Credit Corp (1985) 19 D.’ As he puts it at p 88 ‘is it really a principle of private law that parties' rights may be forfeited to convenience?’ . Cf from the reasoning regarding cost of Dillon LJ in Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 CA at 28. thereby crowning it the conqueror of Clayton’s rule.R. it is submitted in any event that it would be more appropriate to apply the ‘Rolling Charge’ system. But if such a phenomenon were to ever occur outside of a banker-customer context. (4th) 470. there is no evidence directly or indirectly rebutting the rule and there are clear accounts of debits against the credits. 496-498. Contemporary computing hardware and software has since advanced in the last 20 years and the position is likely to change.L.186 185 Conaglen M.185 Even where traditionally the pari passu system might be more preferable. 2007) Delany H. ‘Contest between rival trust beneficiaries’ [2005] 64(1) CLJ 45 Duggan A. ‘Tracing into an overdrawn bank account: when does money cease to exist?’ [1995] 16(10) Comp law 307 Baughen S. Evans S. Canadian style: Re Graphicshoppe and other recent cases’ [2006 ] 43 Can. Equity and the Law of Trusts in Ireland (5th Ed.Q. 469 Finkelstein M & Robbins H. 292 Elliott S & Edelman J. ‘Tracing into vanishing Assets: high expectations and equitable remedies’ [1994] 1 Comm LP 211 Conaglen M. 2010) Hanbury & Martin J. ‘Tracing a future for the Common Law: the action for money had and received after foskett v McKeown’ [2002] 31 Comm. ‘Equitable compensation for breach of fiduciary dealing rules’ [2003] 119 LQR 246. Trusts and Equity (9th Ed. Bus. World Rev. The Law of Credit and Security (Roundhall 2011) Burrows A.8. ‘A probabilistic approach to tracing in the law of restitution’ [1983-1984] 24 Jurimetrics J 65 Fox (1998) ‘Constructive notice and knowing receipt: an economic analysis’ [1998] 57 CLJ 391 . ‘Target holdings considered in Australia’ [2003] 119 LQR 545. Modern Equity (17th Ed Sweet & Maxwell 2005) Ramjohn M. 2011) Donnelly M. Round Hall. OUP. Conaglen M. 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