Until Lionel Smith's study of tracing was released (The Law of Tracing (Oxford 1997)), the subject had only been examined in a handful of scholarly articles. A new title, also called The Law of Tracing, follows not only Smith's work, but a recent flurry of books on the same subject, namely Aruna Nair's Claims to Traceable Proceeds (Oxford 2018), Magda Raczynska's The Law of Tracing in Commercial Transactions (Oxford 2018) and Dennis Ong's Ong on Tracing (Alexandria, NSW 2019).
In the new The Law of Tracing, the authors aim to meet two challenges: to develop a general theoretical account of tracing and a justification for it (p. 1). Hafeez-Baig and English also produce a comprehensive account of the low-level rules of tracing in both general and particular circumstances, which can be considered a third fundamental aim of the book: setting out the law of tracing. This distinguishes their volume from Raczynska's and from Nair's, who spend more time on theory, leaving less room for this broader treatment. Moreover, while Hafeez-Baig and English share this broad approach with Ong, they take very different positions on many issues. Moreover, Hafeez-Baig and English, unlike Nair, eschew an examination of the murky historic origins of tracing. Nonetheless, they closely analyse the case law, accepting that authority must be respected (if not taken as universally correct).
Chapter 1 thus stakes out the foundations of the authors’ theory. They generalise the conventional notion that tracing concerns claims over substitute property exchanged for property originally owned by the claimant. “Tracing is concerned with the circumstances in which one right (or set of rights) can stand in the place of another right (or set of rights)” (p. 4). It is a response to the “unauthorised use of rights (the original rights) to acquire or create new rights (the substitute rights)” (p. 5). This applies to tracing the proposition of McFarlane and Stevens that “equitable property” is best seen as a right to a right held by one on behalf of another (“The Nature of Equitable Property” (2010) 4 Journal of Equity 32). Like Nair, Raczynska and Ong, and like Tatiana Cutts, who did the analytic heavy lifting (“Tracing, Value and Transactions” (2016) 79 M.L.R. 381), Hafeez-Baig and English reject Smith's view that tracing is a merely evidential process in which one tracks the value from original to substitute whereupon the same claim-rights attach. This frees tracing from the restrictions that follow from that view, and substitutes others.
In Chapter 2, Hafeez-Baig and English develop their justification for tracing: “the duty of next-best compliance best explains the current law” (p. 57, emphasis added). This theory has its origins in the work of John Gardner (“What Is Tort Law For? Part 1” (2011) 30 Law and Philosophy 1, 33) in tort. After the transaction, the exchanger must do the next-best thing to complying with the original obligation: hold the substitute for the beneficiary since “the reasons underlying that obligation do not disappear” (p. 58).
This is an open-textured specification, which is highly flexible but, with the assistance of clarifying authority, can and does set bounds to what can and cannot be traced. In this we see both the strengths and weaknesses of adopting the duty of next-best compliance (“DNBC”) into tracing. There is only so much bite the DNBC can have on the case law when it itself relies on the case law to define it. It also is susceptible to having gaps and limited predictive power. Conversely, being so reliant on authority brings the great utility that it is less susceptible to generating false predictions.
These theories go to the heart of the authors’ scholarship so these points require some development. There are three main issues that illustrate the weakness of the DNBC in this context. The first concerns the rule that tracing requires transactional, not causal links – that is, one may only claim substitutes obtained with, not merely because of the receipt of, the original. This, they argue, is because the new right “was acquired lawfully and has no connection to the right originally held on trust” (p. 61). But this is a circularity. What breaks the circle is the authority holding there is indeed no connection, despite the causal link, for the purposes of tracing.
The other two big issues in adopting this theory reflect the lacunae in the authorities. First, why should the claimant be entitled to any additional value in the substitute? The example of the winning lottery ticket purchased with $1 of trust money is given (p. 62). It is not at all clear why the DNBC demands more than a lien over the proceeds, since priority in insolvency is all that was lost by the misappropriation. Is not the next-best thing to ownership of $1 a priority claim to $1 rather than ownership of $1m? The explanation is that the DNBC is not one of “perfect … or ‘better than perfect’ compliance”. It is “the next-best to perfect compliance” (p. 63). But while this echoes the DNBC's theoretical antecedents, it does little to say why taking the profit is justified. Only authority does. Indeed, those propositions, in the abstract, point the other way even if the exchanger is culpable.
Second, if the exchanger is innocent, one instinctively sees less justification still due to the absence of fault. As Hafeez-Baig and English note, fault does matter in the tracing rules: until innocent recipients acquire notice, they may dissipate the property liability-free (p. 62). The countervailing reason against liability under the DNBC here is that it would make an innocent party worse off. But if one traces into the exchange product made before notice of the wrongdoing is acquired (claiming afterwards), again, is the claimant limited to a lien? The DNBC cannot answer this question since it is interested not in fault but an unauthorised exchange (p. 60). As the authors say, both remedies are consistent with it (p. 63). As a matter of authority, the question is open and a final answer will have to come in a new case. But there is plainly a tension between allowing innocent dissipation on the one hand and access to innocently-made profits on the other, one the DNBC has no bite on.
The authors’ theories begin to enjoy more success in Chapter 3. Here, they argue common law tracing does not, as a matter of authority, and should not, as a matter of principle, exist. The former is by the acceptance of the now-conventional view that common law tracing was invented in error by judges who mistook equitable rules for common law ones. The latter is because the structure of common law property rights lacks the necessary doctrinal components for tracing to work. To show this, the authors use the leading cases as exemplars. Only equity has the superstructure, they argue, to allow one to hold a right on behalf of another with sufficiently sophisticated characteristics, which is what their justification of tracing requires.
Here, Hafeez-Baig and English differ sharply with Ong, who takes the position that the common law's rules of property can support a more limited form of tracing, and those leading cases simply stretched it beyond its limits (Ong on Tracing, pp. 27ff.) Indeed, Hafeez-Baig and English follow Millett L.J.'s direction that, despite its provenance, common law tracing is here to stay in England (though Australia may not have committed itself) and thus its rules need to be set out, something done in Chapter 4. Given this, and the apparent utility of common law tracing, it is curious that they did not engage with Ong's position. Would it satisfy Hafeez-Baig and English's strictures? We are not told.
In Chapter 5, determining the scenarios where equitable tracing is possible, the authors’ theories come into their own. Hafeez-Baig and English develop a fundamental pre-requisite to trace from their theories and justifications: it is not simply that there are pre-existing equitable property rights. Instead, it is that there are rights held on behalf of another, including when that position is generated by the impugned transaction. Equitable tracing is, therefore, possible not only over fixed trusts, but also in the categories of discretionary trusts, liens, charges, property retrospectively vested upon rescission, transactions voidable in bankruptcy and fiduciary and non-fiduciary stewardship of property. Thus, the theory shows its teeth by delimiting the outer bounds of what may be traced and when. It also yields a novel critique of the much-derided pre-requisite of an initial fiduciary relation, showing it is too narrow. A split in common law and equitable title is also too narrow. The DNBC, then, exerts tight control over when we may trace, if not to what extent.
Chapter 6 deals with mixtures of property from different sources and receives the most time spent on a single topic. The principles and rules are explained lucidly and analysed with the benefit of the hindsight the deciding judges never had. The looseness of the authors’ theories does not constrain these explanations, which therefore do not require the use of fictions to get around any theoretical limits on the rules (cf. Lionel Smith, The Law of Tracing, pp. 77–80). Chapter 6 also benefits from a thorough examination of the rules for allocating competing rights in deficient mixtures claimed by innocent contributors, including the very latest Australian authority on the rolling charge method. This sheds considerable light on the options for dealing with this problem.
Chapter 7 concerns tracing into improvements to property, insurance proceeds, the payment of a debt and backward tracing. Here, the authors’ stricture that tracing is a claim over new rights acquired or created in an unauthorised transaction bites again. Consequently, one cannot trace into improvements to property, an overdraft or a debt since no new rights are created from the old rights. Backward tracing (a claim over a debit made before, but in coordination with, a later credit of misappropriated money) is, however, justifiable as a pragmatic exception to this rule, one needed to fight fraud. It simply has to be tightly defined and kept within bounds. Throughout this chapter (entitled “hard cases”) there is substantial analysis of both principle and authority. Even if one does not accept the authors’ positions – the authorities are hesitant at best in places – the analysis will be of great assistance when a knotty problem arises for argument and decision.
Once again, however, the tensions in the authorities might have been explored further. If there can be backward tracing, why cannot there be tracing from a deposit into a withdrawal from an overdrawn account where, similarly, the two are tightly connected? Both are cases of merely notional attribution with much in common. The authors note this is an open question (p. 245) but do not evaluate the normative merits of each position or the possible outcomes.
Chapter 8 sets out the bars to tracing. Most are uncontroversial so the treatment is short, but the book is an end-to-end treatment. The most controversial question is whether change of position ought to be a bar. This is left for another work since the authors, through their justifications for tracing, reject the applicability of the principles of unjust enrichment.
The new Law of Tracing certainly achieves its goal to set out just that. In doing so, it strikes a balance between having a grand explanatory theory from which all the rules and principles deductively flow and a more flexible theory formed inductively from the authorities. My criticism that it could have been pushed further towards the former is tempered by the advantages of the latter. Indeed, the law of tracing is not fully formed, so characterising it as precisely as possible, but not too precisely, is a fine objective. And in Chapter 5 this compromise was deployed to particularly good effect.
This leads us to the final questions: Will the new Law of Tracing be the last word on the subject? Plainly no. Will it assist our understanding of the law and drive it forward? Plainly yes. Its clarity, attention to detail and insightful analysis makes it a valuable addition both to the academic debate and the practitioner's toolbox.
