DEFENCES TO TRACING CLAIMS

The following discussion is culled broadly from GW Thomas and

AS Hudson, The Law of Trusts (Oxford University Press, 2004)
and acts as a stop-gap between editions 3 and 4 of my student
text Equity & Trusts which has not yet been updated to reflect
these matters.

The range of defences to tracing claims

Under English law at present there are a number of defences to a tracing claim: change of
position, passing on, estoppel by representation and bona purchaser for value without
notice. The cases seem to be pulling in different directions: some towards restitution of
unjust enrichment, others towards general equitable principles (principally based on
estoppel).

Change of position

The basis of the defence of change of position

The defence of change of position will be available to a defendant who has received
property and, on the faith of the receipt of that property, suffered some change in their
personal circumstances. The foundations of the defence were set out in the following
1

terms by Lord Goff in his speech in the House of Lords in Lipkin Gorman v Karpnale: 2

‘I am most anxious that, in recognising this defence to actions of restitution,

nothing should be said at this stage to inhibit the development of the defence on a
case by case basis, in the usual way. It is, of course, plain that the defence is not
open to one who has changed his position in bad faith, as where the defendant has
paid away the money with knowledge of the facts entitling the plaintiff to
restitution; and it is commonly accepted that the defence should not be open to a
wrongdoer. These are matters which can, in due course, be considered in depth in
cases where they arise for consideration. They do not arise in the present case.
Here there is no doubt that the respondents have acted in good faith throughout,
and the action is not founded upon any wrongdoing of the respondents. It is not
however appropriate in the present case to attempt to identify all those actions in
restitution to which change of position may be a defence. A prominent example
will, no doubt, be found in those cases where the plaintiff is seeking repayment of
money paid under a mistake of fact but I can see no reason why the defence
should not also be available in principle in a case such as the present, where the
1 Lipkin Gorman v Karpnale [1991] 2 AC 548.
2 [1991] 2 AC 548 at 580.

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 plaintiff’s money has been paid by a thief to an innocent donee, and the plaintiff
then seeks repayment from the donee in an action for money had and received. At
present I do not wish to state the principle any less broadly than this: that the
defence is available to a person whose position has so changed that it would be
inequitable in all the circumstances to require him to make restitution, or
alternatively to make restitution in full. I wish to stress however that the mere fact
that the defendant has spent the money, in whole or in part, does not of itself
render it inequitable that he should be called upon to repay, because the
expenditure might in any event have been incurred by him in the ordinary course
of things. I fear that the mistaken assumption that mere expenditure of money
may be regarded as amounting to a change of position for present purposes has
led in the past to opposition by some to recognition of a defence which in fact is
likely to be available only on comparatively rare occasions. In this connection I
have particularly in mind the speech of Lord Simonds in Ministry of Health v
Simpson .’3

The key themes to emerge from this passage of Lord Goff’s speech are as follows.
 There are no boundaries placed on the future development of the defence although
it is not anticipated that it will develop into a defence of very general application.
For example, simply that the defendant has spent money will not in and of itself
demonstrate a change of position. At the very least the expenditure of money
would need to be balanced, as with any other detrimental act, against the injustice
of permitting the claimant to trace their property rights into the property in the
defendant’s hands.
 Bad faith will obviate reliance on the defence, which is line with the defence in
general terms being concerned with balancing the inequity of requiring the
defendant to make restitution against the inequity of denying the vindication of
the claimant’s proprietary rights.

A more concise judicial statement of the manner in which the defence of change of
position can be extracted from the (partially dissenting) speech of Lord Goff in
Westdeutsche Landesbank v Islington: 4

‘Where an innocent defendant’s position is so changed that he will suffer an

injustice if called upon to repay or to repay in full, the injustice of requiring him
so to repay outweighs the injustice of denying the plaintiff restitution.’

Thus the court is required to consider whether it would be more inequitable to permit the
defendant to retain the property or whether it would be more inequitable to require the
defendant to return the property to the claimant on the basis that the defendant had acted
in reliance on having acquired rights in that property. 5

3 [1951] AC 251 at 276.

4 [1996] AC 669.
5 Scottish Equitable v Derby [2000] 3 All ER 793, High Court; [2001] 3 All ER 818, Court of Appeal .

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What is “bad faith” in such circumstances?

What constitutes bad faith in such circumstances remains a difficult question. If a

commercial person receives money which was paid by mistake, without making any
inquiries of the payer, and then uses that money in a way which would otherwise
constitute a change of position, it would be doubtful that such a person will be found to
have acted in good faith. Equally if the recipient has said or done something which has
6

encouraged the payer to make that payment, whether innocently or deliberately, then the
recipient will be unlikely to make out the defence of change of position successfully. 7

Change of position will be available to the extent that a defendant made payments
unknowingly to the fictitious subsidiary company of a third party, as part of a scheme to
defraud the defendant and the claimant, but will not be able to rely on that defence in
relation to commissions received as part of the process of making those same payments. 8

That the defence of change of position is predicated on the balance of justice between the
parties, rather than on proving the fault or deliberate action of either party, suggests that
9

even innocent actions of this sort may cause the defence of change of position to be
unavailable. It has been held by Sedley LJ in Niru Battery Manufacturing Company v
Milestone Trading Ltd that the defence of change of position is not dependent upon the
10

demonstration of an absence of bad faith in equal and opposite manner to the obligation
to prove dishonesty in a claim for dishonest assistance. Bad faith in this context is
11

therefore not to be taken to be equivalent to dishonesty.12

What acts of change of position may be taken into account?

The defence of change of position would appear to include, however, all sums expended
by the defendant in reliance on any representation or payment made by the claimant,
including the cost of financing a proposed transaction between the parties. Furthermore,
13

where the defendant forgoes an opportunity to take a benefit from another source in
reliance on the payment received from the claimant, then the defendant is entitled to
include such a reliance within her defence of change of position. It has been suggested
14

that even receipt of a payment of money in reliance on an agreement not to contest a

divorce petition might constitute a change of position. What the defendant cannot do is
15

6 Niru Battery Mfg Co v Milestone Trading Ltd [2002] EWHC 1425 (Comm), para 135,
per Moore-Bick J.
7 See Larner v London County Council [1949] 2 KB 683 at 688 per Lord Denning.
8 Maersk Air Ltd v Expeditors International (UK) Ltd [2003] 1 Lloyds Rep 491.
9 See Dextra Bank and Trust Company Ltd v Bank of Jamaica [2002] 1 All ER (Comm)
193, para 142.
10 [2003] EWCA Civ 1446.
11 Ibid, para 179.
12 Ibid, para 182.
13 Sanwa Australia Finance Ltd v Finchill Pty Ltd [2001] NSWCA 466.
14 Palmer v. Blue Circle Southern Cement Ltd [2001] RLR 137.
15 X v X (Y and Z intervening) [2002] 1 FLR 508, as considered in Commerzbank v
Price [2003] EWCA Civ 1633, para 68, per Munby J.

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seek to rely on the benefit of a contract which turned out to have been void nor to have
16

acted in good faith reliance on a payment in circumstances in which they have acquiesced
in the action which rendered such payment void. In any event, the defendant is required
17

to have acted in good faith in seeking to assert a defence of change of position. 18

However, if the defendant has had the benefit of money paid to her, for example in that
she has earned interest on that money or has saved herself banking charges by not going
overdrawn to the extent of that payment, then the defendant will be required to account
for any such benefit in reducing the worth to her of the change of position defence. 19

Where for example the defendant received £10,000 from the claimant and thus earned
interest on that £10,000, the claimant will be entitled to reduce the amount which the
defendant claims is represented by his change of position to account for that interest
earned.

Change of position in relation to mistaken and to windfall payments

In recent years there have been a slew of cases on change of position. So, in Scottish
Equitable v Derby where a pensioner received a payment of about £172,400 from a
20

pension fund of which he was a member by mistake, the issue arose whether the pension
fund could recover the money. The pensioner had not taken any steps nor refrained from
any action on receipt of the windfall from the pension fund, except for an expenditure of
about £9,600 on his family’s home. The pensioner contended, however, that to repay the
money to the pension fund at a time when he was separating from his wife would cause
him great financial hardship. In effect he was arguing that it would have been unfair for
him to have repaid the money because he had come to consider that money as being “his”
since his receipt of it. The change of position which he hastily alleged was the
disappointment this would cause him and his wife who were dividing their property on
divorce on the basis that he owned this large windfall. However, it was held in the High
Court that because his hardship was not causally linked to the mistaken payment to him
(the hardship having resulted from his separation whereas the payment was caused by an
unrelated administrative error), the pensioner was not entitled to rely on the defence of
change of position, except in relation to the £9,600 which he had spent in reliance on his
receipt of the money. The Court of Appeal held that the sums claimed by the claimant
21

were so large that they bore no relation to the detriment which the defendant pensioner
was claiming he had suffered by way of a change of position. Therefore, the pensioner
22

16 South Tyneside Metropolitan Borough Council v Svenska International plc [1995] 1

All ER 545.
17 Standard Bank London Ltd v. The Bank of Tokyo Ltd [1995] 2 Lloyd’s Rep 169,
infra.
18 Lipkin Gorman v. Karpnale [1991] 2 AC 548; South Tyneside Metropolitan Borough Council
v Svenska International plc [1995] 1 All ER 545; Euroactividade AG v Moeller
(unreported) 1st February 2001. See also Lloyds Bank v Independent Insurance [1999]
2 WLR 986; Friend’s Provident v Hillier Parker [1995] 4 All ER 260.
19 Pearce v. Lloyds Bank plc (unreported) 23rd November 2001.
20 [2000] 3 All ER 793.
21 [2000] 3 All ER 793.
22 [2001] 3 All ER 818.

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was not entitled to retain the full £172,400 but he could retain the £9,600 which he had
spent in good faith. The Court of Appeal also considered the question of estoppel by
representation, which is discussed below.

Similar issues arose in Philip Collins Ltd v Davis where overpayments were made to one
23

of Phil Collins’s backing singers by mistake. The singer sought to retain that money
simply on the basis that she thought she was due it, even though her contract provided
expressly to the contrary. The employer proposed to recover the money by withholding it
from future royalties which would otherwise have been paid to the singer. The singer
contended that she had changed her day-to-day lifestyle in reliance on the receipt of the
money. It was held that the singer bore the burden of proving that the defence applied to
her. On these facts she was entitled to resist recovery of half of the overpayments in that
she had changed her lifestyle in reliance on having received them. It might be suggested
that this is a thin premise on which to deny the claimant recovery of money which had
been paid mistakenly, to which the defendant had no entitlement, and to which one might
have expected the defendant to realise she had no entitlement. 24

It is not sufficient for the claimant to argue that his expectations in receiving the windfall
would be disappointed by return of the money to the payer (in that he would have less
money than he had otherwise thought): rather there must be some change in position (by
the taking of steps which would not otherwise have been taken, or refraining from some
action which would otherwise have been taken) linked to the receipt of that money in
circumstances in which it could not be alleged by the defendant that she had any good
reason to assume that the money was rightfully hers. Therefore, where a payment is
25

made mistakenly without any representation that the defendant was entitled to that money
to which she would not otherwise be entitled, and where the sum of money was so large
that the defendant ought reasonably to have realised that there had been a mistake, then
there should be no defence of change of position. What is required is that the transfer of
26

23 [2000] 3 All ER 808.

24 Indeed this finalelement – as to the conscionability or reasonableness (where
those two terms are taken to be broadly similar in this sense) of the defendant failing
to notice that she has received an overpayment – might be considered an important
element of this defence in the future. Such an approach would recognise the
importance of proof of a link between the conscionability of the change of position, or
the hardship that the claimant would suffer, and the receipt of the money. See, for
example, Lloyds Bank v Independent Insurance [1999] 2 WLR 986; Home Office v.
Ayres [1992] ICR 175.
25 What is not addressed, ibid, is what would have happened if the pensioner had separated from his wife
because he had received this money and could therefore support himself with the money received.
26 State Bank of New South Wales v Swiss Bank Corporation (1995) 39 NSWLR 350: a
case in which a bank received a very large electronic payment transfer from another
bank without any clear instruction as to which account or customer that amount was
to have been credited – it was held that, while not dishonest, the recipient bank could
not credibly claim that it was entitled to rely on the receipt of so large an amount
without any identified payee, so as to have changed its position. See also Philip
Collins Ltd v Davis [2000] 3 All ER 808.

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the property which is being traced should be referable in some way to the change of
position.27

Change of position as an equitable defence concerned to effect justice

The foregoing principles are usually taken to be based on restitutionary of unjust

enrichment, whereas there is more recent authority which explains the operation of this
defence on generally equitable principles. On the cases up to now, the general principle
on which the courts are currently recognising the operation of the defence of change of
position has been variously expressed that “the essential question is whether on the facts
of a particular case it would in all the circumstances be inequitable or unconscionable,
and thus unjust, to allow the recipient of money paid under a mistake of fact to deny
restitution to the payer” and in terms that “… courts … are not tied to a single rigid
28

standard in deciding whether a defence of change of position succeeds. They are to

decide whether it is equitable to uphold the defence. Since the doctrine of restitution is
centrally concerned with the distribution of loss among parties whose rights are not met
by some stronger doctrine of law, one is by definition looking for the least unjust solution
to a residual problem”. The keynote of the defence of change of position has become its
29

transformation into a general, equitable form of defence which is concerned “founded on

a principle of justice designed to protect the defendant from a claim to restitution in
respect of a benefit received by him in circumstances in which it would be inequitable to
pursue that claim, or to pursue it in full”.
30

Whether future liabilities will amount to a change of position

Thus far our focus has been on a defendant who has changed his position after receipt of
the traced property but before the action comes to court. What has not been considered
thus far in this discussion is the position in relation to a defendant who has generated
liabilities which will change his position only in the future. The authorities are in conflict.
In Lipkin Gorman v Karpnale it was accepted without much discussion that such future
31

liabilities would found the defence of change of position, although in South Tyneside
Metropolitan BC v Svenska International plc it was held by Clarke J that the change of
32

position must have taken place after receipt of the property. In this latter case the bank
had entered into hedging transactions in anticipation of amounts which it would receive
from the local authority under an interest rate swap contract which was subsequently held
to have been void ab initio. It was held that the bank could not claim that its hedging
policy – involving the creation of financial instruments with third parties the effect of
27 Philip Collins Ltd v Davis [2000] 3 All ER 808 at p 827f, per Jonathan Parker J.
28 Niru Battery Manufacturing Co and anor v Milestone Trading Ltd and ors [2003]
EWCA Civ 1446, para 162, per Clarke LJ.
29 Niru Battery Manufacturing Co and anor v Milestone Trading Ltd and ors [2003]
EWCA Civ 1446, para 192, per Sedley LJ.
30 Dextra Bank and Trust Co v Bank of Jamaica [2002] 1 All ER (Comm) 193, para 38.
31 [1991] 2 AC 548.
32 [1995] 1 All ER 545.

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which was expected to cancel out the effect of any loss suffered under the swap contract
with the local authority – could not found a defence of change of position because those
hedging contracts were created before its obligation to effect restitution of payments
arose. This decision was considered to have been reached on “exceptional” circumstances
by the Privy Council in Dextra Bank and Trust Co v Bank of Jamaica . 33

In Dextra Bank and Trust Co v Bank of Jamaica the Privy Council was prepared to hold
34

that incurring a future liability would constitute a change of position. Dextra had been
approached by W who induced it to lend US$ 3 million to the Bank of Jamaica secured
by a note issued by the Bank of Jamaica, although W had no authority to execute this
transaction. W in turn convinced the Bank of Jamaica that the money was to be used in a
foreign exchange transaction to acquire its equivalent in Jamaican dollars. This was a
fraudulent conspiracy. The Bank of Jamaica paid out the equivalent of US$ 3 million in
Jamaican dollars to the conspirators, all the while believing that it was making payment
to Dextra. The argument was raised, inter alia, that the Bank of Jamaica could have relied
on the defence of change of position to Dextra’s action in restitution. During the
transaction, the Bank of Jamaica had paid Jamaican dollars before Dextra’s cheque had
cleared into the Bank of Jamaica’s accounts and therefore the change of position was in
relation to a future payment at that stage. The Privy Council was of the opinion that there
was no objection to such a claim. They preferred to permit the defence to be broadly
understood, on the following terms: 35

‘It is surely no abuse of language to say, in the second case as in the first, that the
defendant has incurred expenditure in reliance on the plaintiff’s payment or, as it
is sometimes said, on the faith of the payment. It is true that, in the second case,
the defendant relied on the payment being made to him in the future (as well as
relying on such payment, when made, being a valid payment); but, provided that
his change of position was in good faith, it should provide, pro tanto at least, a
good defence because it would be inequitable to require the defendant to make
restitution, or to make restitution in full. In particular it does not, in their
Lordships’ opinion, assist to rationalise the defence of change of position as
concerned to protect the security of receipt and then to derive from that
rationalisation a limitation on the defence. The defence should be regarded as
founded on a principle of justice designed to protect the defendant form a claim to
restitution in respect of a benefit received by him in circumstances in which it
would be inequitable to pursue that claim, or to pursue it in full.’

That a change of position can take place before the property is received has been
accepted in Commerzbank AG v Price in which case a merchant banker took the
36

decision not to seek alternative employment on the basis that he would receive a
severance payment from the bank which employed him at the time: it was no objection to
his reliance on the defence of change of position that his alleged change of position took

33 [2002] 1 All ER (Comm) 193.

34 [2002] 1 All ER (Comm) 193.
35 [2002] 1 All ER (Comm) 193, para 38.
36 [2003] EWCA Civ 1633.

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place before his receipt of the property. A future liability has been held not to amount to a
factor sufficient to found the defence of change of position in Pearce v Lloyds Bank. In 37

that case the defendant’s bank had set-off amounts in the defendants bank account against
forged payment instructions which it had received from third parties out of that same
account. The defendant contended that the bank ought not to have been entitled to set off
those amounts because the defendant would have been liable to pay value-added tax on
the payments which had passed in and out of that account. At the time, however, these
future liabilities to value-added tax had not been discharged. It was held that such future
liabilities could not found a defence of change of position.

It is suggested that the approach taken in Dextra Bank and Trust Company Ltd v Bank of
Jamaica is to be preferred. Once a liability becomes legally enforceable, whether or not it
has been discharged, then the defendant can be considered to have changed his position in
the sense that his balance sheet will show that he owes a liability and not that the assets
necessary to discharge that liability constitute free funds.

Passing on

The defence of passing on bears some similarity to the defence of change of position.
Passing on requires that the defendant has passed the property on or that some expense
has been incurred such that the value of the property has effectively been passed on to
some third person. The defendant will therefore claim that she does not have possession
of the property, nor of its traceable proceeds because that property has been transferred to
another person without receipt of any traceable proceeds. Given that tracing is a
proprietary claim, it is necessary for there to be some traceable proceeds in the hands of
the defendant. Otherwise to impose a liability on the defendant to account to the claimant
with some property which was not the traceable proceed of the claimant’s original
property would be to impose a personal claim on the defendant rather than a proprietary
claim.

The defence of passing on was raised before the Court of Appeal in Kleinwort Benson v
Birmingham CC. That case concerned an interest rate swap in which the bank claimed
38

that the defence of passing on should have been available to it on the basis that the
contract with the local authority (which was subsequently held to have been void ab
initio) had caused the bank to incur extra expense to manage the risk of the transaction.
The Court of Appeal held, however, that there was no necessary link between the contract
with the local authority and the bank’s decision to incur that expense by means of a
hedging strategy over which the local authority had not control. Therefore, the passing on
defence is available, where the property has been passed on, but not where there is no
link between the expenditure and the liability incurred.

37 [2001] EWCA Civ 1097.

38 [1996] 4 All ER 733; AS Hudson, ‘Proprietary rights in financial transactions’ (1997) Amicus
Curiae, 2 November, 27.

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Estoppel by representation

Estoppel by representation is a defence which is similar, at least at first blush, to that of

change of position. The significant difference between the two defences is that the
estoppel is predicated on some representation being made by the claimant, as opposed to
a balancing of the competing equities of the case as suggested by the defence of change
of position. Where the defendant to a tracing action can demonstrate that some
39

representation has been made to her, that that representation was deliberately or
accidentally false, that the claimant knew the representation would be acted upon, the
defendant then acts to her detriment in reliance upon the representation, and there is no
defence to the estoppel. This estoppel has been recognised both at common law and in
equity. 40

A good example of this defence in action arose in National Westminster Bank plc v
Somer International. Somer held a US dollar account with the bank into which it paid
41

moneys received from foreign clients. Somer was expecting to receive a sum of between
US$70,000 and US$78,000 from one of its clients and informed the bank of this.
Subsequently the bank received a payment of US$76,708 which was intended for another
of its accountholders but which it mistakenly credited to Somer’s US dollar account. The
bank informed Somer that the money had been paid into its dollar account and Somer
assumed that it was the payment which it was expecting to receive from its own client. In
reliance on the receipt of the money, Somer shipped £13,180 worth of goods to the client
from which it was expecting the payment. Subsequently, the bank sought to recover the
mistaken payment. Somer argued that it was entitled to an estoppel by representation
because the bank had represented to it that the money belonged to Somer, that Somer had
acted to its detriment in reliance on that representation and that it was therefore entitled to
retain the whole of the moneys paid to it by the bank.

Previously, the doctrine of estoppel by representation had operated as a rule of evidence

to the effect that a claimant would have been entitled to retain the whole of a mistaken
payment. The Court of Appeal held that the doctrine of estoppel by representation
42

operated on equitable principles such that it was possible to operate outwith any strict
rule requiring that the defendant be entitled to retain the whole of the payment. Rather,
where the court considered the retention of the whole of the payment to be
unconscionable, it would be possible to limit the defendant’s entitlement to rely on the
estoppel only to the extent that it had suffered detriment. Therefore, on these facts, Somer
could retain only an amount equal the value of the goods which it had shipped in reliance
on the representation. This mooted development is, however, at odds with earlier
43

authority and the flexibility of the older, purely evidential form of the estoppel by
representation consequently awaits confirmation by a higher court. 44

39 Goff and Jones 829.

40 Jordan v Money (1854) V HLC 185, 10 ER 868.
41 [2002] QB 1286, CA.
42 Avon County Council v Howlett [1983] 1 WLR 605.
43 Scottish Equitable v Derby [2001] 3 All ER 818 applied.
44 See Avon County Council v Howlett [1983] 1 WLR 605 at 622 per Slade LJ.

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Bona fide purchaser for value without notice of the claimant’s rights

The availability of the defence of equity’s darling involves the perennial problem of
deciding between the person who has lost their property to a wrongdoing fiduciary, and
the person who buys that property in all innocence. Suppose the example of the painting
held on trust for beneficiaries which is transferred away in breach of trust by T. Suppose
then that the painting is purchased by E in good faith for its full market price. E will
necessarily take the view that she has paid an open market price for property in
circumstances in which she could not have known that the property ought properly to
have been held on trust. By the same token, the beneficiaries would argue that it is they
who ought to be entitled to recover their property from E. From a strict, analytical
viewpoint, the property lawyer ought to find for the beneficiaries. At no time do the
beneficiaries relinquish their property rights in the painting before E purchases it.
Therefore, those rights ought to be considered as subsisting. E cannot acquire good title
on the basis that the beneficial title still properly remains in the beneficiaries. The
approach of equity, though, is to protect free markets by ensuring that the bona fide
purchaser for value without notice of the rights of a beneficial owner is entitled to assert
good title in property in such situations. Such a person is rightly referred to as ‘Equity’s
darling’. Consequently, good defence to a tracing claim would appear to be an assertion
that you are a purchaser acting in good faith without notice of the rights of the
beneficiary. 45

Consensual transfer

If the original owner of the property had either made a perfect gift of the property to the
defendant or had entered into a contract to transfer the property to the defendant, then the
defendant ought to be recognised as having a complete defence to any tracing claim. The
second proposition is clearly an extension of the bona fide purchaser principle,
potentially, into cases in which the contract transferring the property might not constitute
a contract of sale. The former principle seems to be common sense. In the event that there
has been a transfer of absolute title from the claimant to the defendant without any duress
or undue influence, then the common law would recognise the defendant’s ownership of
that property. It would only be cases of vitiated consent, such as undue influence, which
would prevent a claim being founded on tracing. Thus it is possible to sever a claimant’s
ties with her original property or its traceable proceeds where she can be taken to have
agreed to transfer title in it. The only complication here is where there was an intention to
transfer that property away which the claimant subsequently sought to disavow, as in
National Westminster Bank v Somer in which the claimant appears to have an intention
46

to transfer property at the outset but subsequently realised a mistake and so sought to
reverse that transfer. This issue has been considered in the preceding section.

45 Westdeutsche Landesbank v Islington LBC [1996] AC 669, per Lord Browne-Wilkinson.

46 [2002] QB 1286, CA.

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