Since at least the 16th century, the victims of fraud have often encountered an insuperable obstacle to recovering their money by a common law claim. Money, it was said, had “no earmark”. This saying was a concomitant of the pre-modern monetary system that prevailed when Tudor and Stewart judges first pronounced it. Before the new forms of fiduciary and bank money developed by 17th and 18th century financiers, metallic coin was the only kind of money in circulation. Although individual coins of the same denomination varied significantly in their weight and fineness, they were practically indistinguishable from each other in a mixture (e.g., Core's Case (1537) 1 Dyer 20a, 22b; Isaac v. Clark (1615) 2 Bulst. 306, 314, 308, 310). They lacked distinguishing physical features that would enable the owner to “earmark” his own money. Once the claimant's money was mixed, he could not prove that it was specifically his coins that the defendant withheld from him.
In B.M.P. Global Distribution Inc. v. Bank of Nova Scotia [2009] SCC 15 a unanimous Supreme Court of Canada refused to apply the rule to a claim for damages arising from the reversal of credits in bank accounts. If English courts follow this decision, then the common law rule that money cannot be followed through a mixture will be consigned to history. For the future, rules like those applied in equity to identify mixtures of misapplied trust money may apply to common law claims.
The directors of Global were innocent participants in a fraud. Global received a cheque for $904,563 drawn on the Royal Bank of Canada (“RBC”), which it deposited in its main account at the Bank of Nova Scotia (“BNS.”). The directors dispersed the proceeds to various accounts held by themselves and their related companies, some of which were already in credit. The directors then drew money from the accounts but substantial balances totalling $776,650 remained. Some days later, RBC notified BNS that the cheque was a forgery. BNS agreed to re-transfer the surviving cheque proceeds to RBC. BNS then debited the amount of the cheque proceeds that had been paid into the various accounts so far as their credit balances still allowed.
The Court dismissed Global's damages claim against BNS for reversing the credits in its accounts. RBC made a mistake when it accepted the forged cheque and transferred funds to BNS through the clearing system. BNS would therefore have been liable to RBC in restitution (at [21]–[24], applying Barclays Bank Ltd. v. W.J. Simms Ltd. [1980] Q.B. 677). BNS's banking contract with Global entitled it to reverse credits for which it did not receive a complete settlement, which removed the foundation for Global's claim.
The main significance of the case lies in the Court's endorsement of the sums that Global had to restore to RBC. So far as possible, the cheque proceeds were restored in full, despite evidential uncertainty at three possible stages: first, the mixing of the cheque proceeds in the clearing system; secondly, the mixture with the small credit balances already in the accounts; and, thirdly, the subsequent dissipation of some monies from the accounts by the Global directors.
The Court refused to accept that RBC's funds were untraceable simply because the cheque proceeds had been mixed at the first two stages (at [79]–[84], following Banque Belge pour l'Étranger v. Hambrouck [1921] 1 K.B. 321 and distinguishing Agip (Africa) v. Jackson [1990] Ch. 265 (Millett J.); affirmed [1991] Ch. 265 (CA)). As to the third, the Court assumed that the untraceable withdrawals from the accounts must be borne by the Global directors and their related companies since their money had been credited in the accounts before the cheque proceeds (at [85]). Without explicitly saying so, the Court was applying the rule in Clayton's Case (1816) 1 Mer. 572. This is the rule applied in equity to distinguish money in a current bank account attributable to two innocent contributors: deposits first made are those first drawn against. We can speculate that the Court would have reached the same result, but for different reasons, if the Global directors had had notice of the forgery. The evidential presumption would then have been that the directors dissipated their own monies in the accounts rather than the cheque proceeds. This is the rule applied in equity when a defaulting trustee mixes trust money with his own (Re Hallett's Estate (1880) 13 Ch.D. 696).
With the no earmark rule so fatally undermined, other points of substantive law remain for future cases to decide. One is the nature of a claimant's common law proprietary interest in a mixed fund of money in a bank account. Suppose that D forges a payment instruction on C's bank account for £1,000, and deposits the proceeds to his own account which is already £1,000 in credit. The question is whether C has a direct claim against D's bank for the £1,000 traceable into the credit in D's account, or whether C only has proprietary claim against the bank's debt to D to the extent that it is attributable to his money.
The second explanation is more tenable. It does not entail that D's bank owes a debt to a third party, C, whom it knows nothing about (but cf. Trustee of the Property of F.C. Jones & Sons (A Firm) v. Jones [1997] Ch. 159, 167–8 per Millett L.J.). But this explanation raises a doctrinal question. C's common law claim against D's debt would resemble an equitable lien asserted by a trust claimant against a mixed fund comprising money attributable to himself and the trustee (e.g., Re Hallett's Estate (1880) 13 Ch.D. 696). The common law is said to recognise only a numerus clausus of interests in personal property and non-possessory liens are not one of them. The recognition of a partial proprietary claim against money proceeds traceable into a debt would be a novelty for the common law.
The no earmark rule has outlived its economic rationale and the Supreme Court of Canada was right to consign it to history. The rule made sense in a pre-modern monetary system where the relative untraceability of coins and the recipient's immunity from proprietary claims gave money a greater degree of liquidity than ordinary chattels. But the common law defence of bona fide purchase for value now meets that need (Miller v. Race (1758) 1 Burr. 452). Lord Mansfield C.J.'s trenchant opinion in that case has finally been heeded (ibid., 457): “It has been quaintly said, ‘that the true reason why money cannot be followed is, because it has no earmark:’ but this is not true. The true reason is on account of the currency of it … the true owner cannot recover it, after it has been paid away fairly and honestly upon a valuable and bona fide consideration”.
