The procedure is used in several situations, broadly demarcated by whether the property has been transferred because of theft, breach of trust, or mistake.
[2] If goods sold commercially have not been paid for and the contract of sale included a retention of title clause, tracing by the seller may be required.
Someone with an equitable interest in the property but no legal title, as in MCC Proceeds v Lehman Brothers,[9] cannot recover the money under common law.
In Boscawen v Bajwa,[12] Millett justified this by saying that "equity's power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour".
[13] A limitation is that where the property has been put into a bank account that no longer contains enough money to repay it, it cannot be traced.
In addition, property transferred through breach of trust may be traced to any third party (other than a purchaser in good faith), even if they did not previously have a fiduciary relationship with the claimant.
As laid out in Re Diplock,[21] the principle applied is that the claimant's entitlement ranks pari passu to that of the volunteer; each has an equal claim to their funds.
[22] Whether the fund decreases or increases in value, each party can claim a percentage equal to their contribution.
The long-standing rule is that established in Clayton's Case;[24] that the money deposited first is deemed to be spent on the first property purchased.
In Barlow Clowes International v Vaughan,[26] the Court of Appeal applied a similar set of principles, holding that the size of the contribution and the amount of time the money was part of the mixed fund were the factors to be considered.
The leading case is Westdeutsche Landesbank Girozentrale v Islington LBC,[28] where Lord Browne-Wilkinson declared that a constructive trust would be created when the recipient of the funds became aware of the mistaken transfer.
Any bad faith on the part of the defendant will invalidate the defence, such as if the recipient of the property has encouraged the payer to transfer it or has received it by mistake and then used it without making enquiries.
[32] The defence is also not available to people who act illegally, as in Barros Mattos v MacDaniels Ltd.[33] Activity which constitutes a "change of position" can be broadly defined as taking steps which would not otherwise have been taken, or not taking steps which otherwise would have been taken, as a result of receiving the property.
This is similar to "change of position", and comes about when the defendant can show that the claimant made some false representation to him, which he acted upon to his detriment.
In National Westminster Bank plc v Somer International,[35] however, the Court of Appeal decided that the defendant was only allowed to retain property equal to his losses due to the claimant's representation.
Lastly, if the money has been used to improve the land; in that case, it is inequitable to trace, and the beneficiaries cannot assert any property claim.
The Court of Appeal looked at how much of that money could be traced into the hands of the charities that received it as innocent volunteers.