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Dummy asset tracing

Cutts, Tatiana (2019) Dummy asset tracing. Law Quarterly Review, 135. 140 - 165. ISSN 0023-933X

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It is widely understood that tracing is the process of demonstrating that two rights are linked by an exchange,1 such that a claim to the right given up can be "transmitted" to the right acquired.2 This exercise has attracted the label "exchange-product tracing",3 and its core case is the unauthorised substitution of a trust right: if a trustee swaps the trust right for another in excess of the trustee’s dispositive authority, the beneficiary can trace into the product, and (absent a defence) can claim it.4 Yet, the conceptual ambit of tracing is broader than this central case: if a trustee diverts money from a trust account to that of a third party, it is now well established that the third party receives and may be held accountable for the "traceable proceeds" of the trust account;5 if one or more intermediate accounts are interposed between the delinquent trustee and the payee, the tracing exercise requires proof that a "direct chain of substitutions" connects them.6 This extension is important: almost all instances of tracing involve one or more bank transfers. I argue here that efforts to subsume bank payments within an homogenous law of tracing have been misguided: a bank transfer does not involve a rights-substitution of the kind envisaged by exchange product tracing. Rather, the process that we have called "tracing money" through a bank transfer involves two steps: (i) converting bank money, by artifice, into an asset independent of the underlying account; (ii) following that asset from one location to another. Together, I call these steps "dummy asset tracing". Thus, there are two kinds of tracing: exchange product tracing is the process of linking two rights through an exchange by a single person; dummy asset tracing is the process of pursuing a notional asset (thing or right) from one person to another. In Pt 2 of this article, I describe the orthodox account of exchange-product tracing, and argue that we should treat bank transfers as a case apart from unauthorised substitution. In Pt 3, I explain how we have substantiated the connection between the claimant from whom bank money has been misdirected, and the third party to whom it has been paid. I call this "dummy asset tracing", and I show that it manifests differently in equity and at law: in equity, the claimant follows a notional right into the hands of the defendant; at law, the claimant follows a notional cash thing. I conclude Pt 3 by showing that dummy asset tracing has had important remedial consequences: by pinning liability upon the defendant’s putative receipt of an asset to which the claimant had a prior claim, we have come to replicate the consequences of cash transfers in bank payments cases, thereby increasing the ambit of third party liability. By means of dummy asset tracing, an innocent payee may now be held liable to a claimant with whom they did not transact, and of whom they were wholly unaware.7 In the final part of this article, I argue that existing justifications for dummy asset tracing, and its consequences for third parties, are insufficiently robust. I show that recent authority indicates a move away from dummy asset tracing, towards an approach that would shape and justify liability by reference to the legal relationship that connects claimant and defendant.8 I argue that dummy asset tracing ought to be recognised as an anachronism in this new judicial landscape, and that there are gains to be made by permitting our jurisprudence to evolve beyond it.

Item Type: Article
Official URL:
Additional Information: © 2018 Thomson Reuters
Divisions: Law
Subjects: H Social Sciences > HG Finance
K Law > K Law (General)
Date Deposited: 06 Jun 2018 15:15
Last Modified: 16 Sep 2021 23:05

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