Tracing & third-party liability
Tracing identifies trust property or its substitute in another's hands; third-party liability targets strangers who receive trust property or assist a breach. These extend recovery beyond the trustee.
What "Tracing & third-party liability" covers
- Tracing is a process of identifying value, not a remedy; equitable tracing requires an initial fiduciary relationship and can follow property into mixed funds.
- Mixing trust money with a trustee's own money: the beneficiary may charge the whole fund and the trustee is presumed to spend their own money first (Re Hallett), or claim a proportionate share of an asset bought (Foskett v McKeown).
- Where the wrongdoer's own money runs out, the beneficiary may claim the traceable proceeds still identifiable (Re Oatway); loss of the identifiable fund ends tracing.
- For mixing between two innocent claimants in a bank account the default rule is 'first in, first out' (Clayton's Case), often displaced by a pari passu (proportionate) approach (Barlow Clowes v Vaughan).
- Knowing receipt (a personal claim): the defendant received trust property for their own benefit, in breach of trust, with knowledge making retention unconscionable (BCCI v Akindele).
- Dishonest assistance (a personal claim): a stranger who dishonestly assists a breach of trust is liable even if they never received trust property; dishonesty is judged by the objective standard (Royal Brunei v Tan; Ivey v Genting).
- The bona fide purchaser of the legal interest for value without notice takes free, defeating an equitable tracing claim.
Key cases & statutes
The authorities and provisions most likely to matter for this subtopic:
How it's tested in SQE1
SQE1 uses single best answer questions: a short factual scenario, one precise question, and five options of which only one is the best answer on the law applied to the facts. For tracing & third-party liability, expect to be asked what the correct legal position is, what a party may or must do, or which outcome follows — with more than one option looking arguable. Reading the facts carefully and eliminating the near-misses is the skill that earns the mark.
Where candidates lose marks
- Treating tracing as a remedy in itself rather than a process that identifies property to which a remedy attaches.
- Confusing knowing receipt (requires receipt for own benefit) with dishonest assistance (requires no receipt but requires dishonesty).
- Applying Clayton's Case rigidly where it produces injustice; courts favour a proportionate approach (Barlow Clowes).
Learn and practise this subtopic
A guided lesson and exam-style questions on tracing & third-party liability.
FAQ
Is tracing & third-party liability tested on SQE1?
Yes — tracing & third-party liability is part of the SQE1 Trusts syllabus (FLK2) and can appear in single best answer questions.
How is tracing & third-party liability examined in SQE1?
SQE1 tests it by application: you're given a realistic scenario and choose the single best answer from five options. The focus is on using the law correctly, not reciting it — knowing the leading authorities (Foskett v McKeown [2001], Re Hallett's Estate (1880)) helps.