Equitable remedies and tracing - Injunctions, specific perfo...

Learning Outcomes

This article explains the nature of equitable remedies, focusing on injunctions, specific performance, and equitable compensation. It also outlines the process of equitable tracing. For the SQE1 assessments, you will need to understand the discretionary nature of these remedies, the circumstances in which they are granted, and the key principles governing tracing. Your understanding will enable you to identify appropriate remedies or tracing actions in factual scenarios presented in SQE1-style single best answer MCQs. A sound understanding of the American Cyanamid guidelines for interim injunctions, the limits on specific performance (such as hardship, supervision and personal services), the measure of equitable compensation for breaches of trust and fiduciary duty, and the tracing rules for mixed funds and bank accounts will be essential. You should also be able to distinguish proprietary tracing claims from personal claims (e.g. knowing receipt and dishonest assistance) and recognise when defences such as laches, clean hands, change of position and the bona fide purchaser doctrine apply.

SQE1 Syllabus

For SQE1, you are required to understand the principles governing key equitable remedies and the process of tracing. It is likely that you will need to differentiate these from common law remedies and apply the rules to specific situations to determine the likely outcome or appropriate legal response, with a focus on the following syllabus points:

• the discretionary nature of equitable remedies and the factors courts consider
• the requirements and application of injunctions (prohibitory, mandatory, interim)
• the American Cyanamid guidelines for interim injunctions: serious question to be tried, adequacy of damages (both sides), balance of convenience, and preservation of the status quo
• the claimant’s undertaking as to damages for interim injunctions and the court’s power to award damages in addition to, or instead of, equitable relief
• special forms of injunction, including freezing orders (Mareva) and search orders (Anton Piller), and when they may be granted
• the conditions under which specific performance may be ordered, particularly regarding contracts for unique subject matter like land, and when it will be refused (personal services, constant supervision, undue hardship)
• the principles of equitable compensation for breach of trust or fiduciary duty, including the modern causation approach and the limited role of foreseeability
• the concept of equitable tracing, its requirements (fiduciary relationship, equitable proprietary interest), and its application in following assets into different forms or mixed funds
• tracing rules in mixed funds and bank accounts (including presumptions in Re Hallett, the primary protection for claimants akin to Re Oatway, the lowest intermediate balance rule, and first-in, first-out contrasted with rateable sharing)
• exceptions allowing backward tracing in coordinated schemes and the limitation on tracing where assets are dissipated
• personal liability claims against third parties (knowing receipt and dishonest assistance) and how they differ from proprietary tracing
• defences relevant to equitable remedies, such as laches and clean hands
• defences in tracing and third-party claims, including bona fide purchaser for value without notice and change of position
• the position of bona fide purchasers for value without notice in tracing claims.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following remedies is generally only available when damages are considered inadequate?
   1. Damages
   2. Specific Performance
   3. Restitution
   4. Account of Profits
2. A court order preventing a party from performing a specific act is known as:
   1. A mandatory injunction
   2. A prohibitory injunction
   3. Specific performance
   4. Equitable compensation
3. Which principle states that a claimant seeking an equitable remedy must not themselves be guilty of related improper conduct?
   1. Laches
   2. Estoppel
   3. Clean Hands
   4. Balance of Convenience
4. Equitable tracing primarily requires the existence of which relationship?
   1. Contractual relationship
   2. Fiduciary relationship
   3. Statutory relationship
   4. Neighbourly relationship

Introduction

Equity developed alongside the common law to provide remedies and achieve outcomes considered fair where the strict application of common law rules might lead to injustice. Unlike common law damages, which are available as of right upon proof of a wrong, equitable remedies are discretionary. This means the court considers all circumstances before deciding whether to grant such a remedy. Key equitable remedies include injunctions and specific performance, primarily used in contract and tort law. Equitable compensation addresses losses from breaches of equitable duties, like those owed by trustees. Tracing is an equitable process, not a remedy itself, used to identify and follow property that has been misappropriated or misapplied. Equitable orders act in personam and are enforceable by contempt proceedings, but courts will not act where compliance is impracticable or where relief would be oppressive or futile.

Key Term: Clean Hands
An equitable maxim meaning that a claimant seeking an equitable remedy must not have engaged in improper conduct related to the matter in dispute.

Key Term: Laches
An equitable defence based on the claimant's unreasonable delay in bringing the claim, such that granting relief would be unfair to the defendant.

Equitable Remedies: Principles

Equitable remedies are distinguished by their flexibility and the court's discretion in awarding them. Several core principles guide the court:

• Discretionary Nature: The court is never obliged to grant an equitable remedy. It considers factors like the conduct of the parties, potential hardship, and overall fairness.
• Inadequacy of Damages: Equity typically intervenes only where the common law remedy of damages would be insufficient to do justice. This is often the case where the subject matter is unique (e.g., land) or where the wrong involves ongoing harm.
• Acting in personam: Equitable orders are directed at the person (the defendant), compelling them to act or refrain from acting. Failure to comply can lead to contempt of court proceedings. Courts also consider whether enforcement is feasible and whether relief would be effective in practice.
• Equitable Maxims: Principles like 'he who comes to equity must come with clean hands' and 'delay defeats equity' (laches) influence the court's decision. A claimant's own misconduct or undue delay can bar relief.
• Just and Convenient: Statutory jurisdiction to grant injunctions is expressed in broad terms; courts may grant relief where it is just and convenient, but will balance competing hardships and avoid orders that require constant court supervision.
• Damages alongside Equity: Courts may award damages in addition to, or in substitution for, equitable relief where appropriate, especially if a narrow infringement does not warrant a prohibitory order but financial recompense can adequately protect the claimant.

Key Term: Injunction
A court order requiring a party to do a specific act (mandatory injunction) or refrain from doing a specific act (prohibitory injunction).

Injunctions

An injunction is a court order commanding or preventing an action. Courts grant injunctions at an interim (interlocutory) stage to preserve the position pending trial, and at a final stage to resolve rights on the merits.

• Prohibitory Injunction: Restrains a party from committing a wrongful act (e.g., trespassing, breaching a restrictive covenant). A quia timet injunction restrains threatened (imminent) wrongdoing where harm is likely unless restrained.
• Mandatory Injunction: Compels a party to undo the effects of a wrongful act (e.g., demolish a structure built in breach of rights). Courts grant these more cautiously than prohibitory injunctions, especially at an interim stage, often requiring a higher degree of assurance that the claimant will succeed at trial before compelling positive action.
• Interim (or Interlocutory) Injunction: Granted before the full trial to preserve the status quo. The court applies guidelines (often referencing American Cyanamid), considering if there is a serious question to be tried, the adequacy of damages for both parties, and the balance of convenience. The court generally seeks to preserve the status quo ante and avoids conducting a mini-trial of the merits.
• Final (or Perpetual) Injunction: Granted after a full trial on the merits, providing a permanent resolution.

Key Term: Undertaking as to Damages
A claimant’s promise to compensate the defendant if it is later decided that the injunction should not have been granted and the defendant has suffered loss as a result.

Courts can award damages in lieu of an injunction where the infringement is small, quantifiable, and a prohibitory order would be oppressive. When assessing interim relief, the claimant’s undertaking in damages is normally required, and the adequacy of the cross-undertakings on both sides forms part of the balance of convenience.

Two powerful interim injunctions often tested conceptually are:

• Freezing orders (Mareva): Designed to prevent a defendant from dissipating assets so as to frustrate a judgment.
• Search orders (Anton Piller): Permit entry to the respondent’s premises to preserve evidence or property at risk of destruction.

Key Term: Freezing Order
A form of interim injunction restraining the defendant from disposing of or dealing with assets to prevent frustration of a prospective judgment.

Key Term: Search Order
An order requiring the defendant to permit entry to premises to search for, copy or preserve evidence or property at risk of destruction; granted only in exceptional cases with strict safeguards.

Courts are particularly exacting with these orders: the applicant usually must show a good arguable case, full and frank disclosure on without-notice applications, identifiable assets within the jurisdiction (for freezing orders), a real risk of dissipation or destruction, and that the order is proportionate with safeguards to minimise oppression.

Worked Example 1.1

Z Ltd is about to launch a product using confidential information unlawfully obtained from its competitor, Y Ltd. Y Ltd discovers this just before the launch. What remedy should Y Ltd seek immediately?

Answer:
Y Ltd should immediately apply for an interim prohibitory injunction to prevent Z Ltd from launching the product and using the confidential information pending a full trial. Damages might not adequately compensate Y Ltd for the loss of confidentiality and market advantage.

Worked Example 1.2

A claimant sues a company for fraud and shows bank statements suggesting the defendant is rapidly transferring funds offshore. Trial is months away. What interim relief is appropriate?

Answer:
A freezing order is appropriate if the claimant can show a good arguable case, a real risk of asset dissipation, and that it is just and convenient to grant the order. The claimant must give full and frank disclosure and provide an undertaking as to damages.

Specific Performance

Specific performance is an order compelling a party to perform their obligations under a contract. It is granted where damages are inadequate, typically involving contracts for unique items like land or rare chattels. The court will consider whether it can effectively supervise performance and whether ordering performance would be oppressive or cause undue hardship.

Key Term: Specific Performance
An equitable remedy ordering a party to perform their specific obligations under a contract.

Key requirements include:

• A valid and enforceable contract with certain terms.
• Damages being an inadequate remedy (e.g., land is generally treated as unique; shares in a private company or a rare chattel may also be unique).
• The claimant being ready, willing and able to perform their own obligations (mutuality).
• The court being able to supervise performance (unlikely for contracts requiring ongoing duties or personal services).
• No undue hardship caused to the defendant, and no other equitable bar.
• The claimant having acted equitably ('clean hands').

Courts rarely order specific performance of contracts of employment or personal services, and legislation prohibits compelling an employee to work by injunction or specific performance. Negative covenants in personal services contracts, by contrast, may be restrained by injunction where it does not amount to indirect compulsion to work for a particular employer.

Where goods are not unique, injunctions may, exceptionally, achieve the same effect as specific performance. For example, during a shortage of essential goods, an injunction restraining breach may ensure continued supply where damages would be inadequate because substitutes are unobtainable.

Worked Example 1.3

Ahmed agrees to sell a rare vintage car to Bella. Before the car is delivered, Ahmed receives a higher offer from Chris and refuses to complete the sale to Bella. Can Bella compel Ahmed to sell her the car?

Answer:
Bella may be able to obtain an order for specific performance. As the car is rare and vintage, damages may be inadequate because Bella cannot easily purchase an identical substitute elsewhere. The court will consider if the contract is valid and enforceable and whether any defences apply.

Worked Example 1.4

A homeowner agreed to sell a house. Before completion, she suffered major health complications and now relies on a close local support network. The buyer sues for specific performance. Will the court order conveyance?

Answer:
The court can refuse specific performance where it would cause hardship amounting to injustice. Even though land is unique, compelling sale here may be oppressive given the seller’s change of circumstances. The buyer would remain entitled to damages.

Equitable Compensation

Equitable compensation is awarded for losses resulting from a breach of an equitable obligation, most commonly a breach of trust or fiduciary duty. Its aim is to restore the claimant (e.g., the trust fund or beneficiary) to the position they would have been in but for the breach. Although historically contrasted with common law damages, modern cases emphasise causation while maintaining that foreseeability and remoteness rules do not confine recovery in the same way as at common law.

Key Term: Equitable Compensation
A monetary remedy awarded in equity for losses caused by a breach of equitable duty (e.g., breach of trust), aiming to restore the claimant to their original position.

Key features:

• Causation: Recovery turns on loss caused by the breach. For misapplication of trust assets, the trustee must reconstitute the fund to the extent the breach caused loss; where the loss would have occurred in any event, compensation may be limited accordingly.
• Assessment with Hindsight: The court may assess loss as at the date of judgment using hindsight to determine the true financial effect of the breach.
• Foreseeability and Remoteness: These common law constraints are not applied strictly; once causation is established, the trustee is generally liable for the full loss flowing from the breach.
• Mitigation/Contributory Negligence: These do not generally reduce compensation for breach of trust, though the court may grant relief to honest and reasonable trustees and may take beneficiary conduct into account when appropriate.
• Interest and Accounts: Interest (often simple; occasionally compound where there is fraud or unauthorised profit) may be awarded. As an alternative to compensatory measures, the court may order an account of profits for fiduciary gains.

Trustees may rely on defences such as informed consent by adult beneficiaries, limitation (subject to exceptions for fraud and recovery of trust property), exemption clauses (not for fraud), and the court’s statutory discretion to excuse an honest and reasonable trustee who ought fairly to be excused.

Worked Example 1.5

A trustee improperly invests £50,000 of trust funds in a highly speculative venture, contrary to the trust deed and their duty of care. The investment becomes worthless. What remedy can the beneficiaries seek?

Answer:
The beneficiaries can seek equitable compensation from the trustee for the £50,000 lost. The compensation aims to restore the trust fund to the value it would have had if the breach had not occurred. The trustee's liability is generally for the full loss directly resulting from the unauthorised investment.

Worked Example 1.6

A trustee-solicitor releases mortgage advance monies to a borrower one day before completing registration of the lender’s charge, contrary to instructions. The borrower later defaults, but the property value fully covers the debt subject to the charge that would have been obtained a day later. What is the likely measure of compensation?

Answer:
Compensation is limited to loss caused by the breach. If, on the facts, proper completion of the security would have left the lender in no worse position, recovery will be confined to losses actually caused by the premature release, not the entire advance. Equity looks to causation rather than imposing strict indemnity divorced from the breach’s consequences.

Equitable Tracing

Tracing is not a remedy itself, but a process enabling a claimant to identify their property (or its value) when it has been taken, misapplied, or mixed with other property. Equitable tracing is more flexible than its common law counterpart and allows claimants to follow value into mixtures and substitutes, provided the essential equitable requirements are satisfied.

Key Term: Tracing
A process used to identify property or its value as it changes hands or form. Equitable tracing allows following property into mixed funds or substituted assets.

Requirements for Equitable Tracing

• Fiduciary Relationship: Traditionally, a fiduciary relationship (e.g., trustee–beneficiary, agent–principal) must exist between the claimant and the person who misapplied the property. In mistaken payment cases outside a trust context, a fiduciary relationship may arise once the recipient’s conscience is affected (e.g., upon knowledge of the mistake).
• Equitable Proprietary Interest: The claimant must have had an equitable interest in the original property, conferring the ability to assert a proprietary claim against substitutes in equity.
• Identifiable Property: The property or its substitute must still exist and be identifiable, even if mixed or converted into another form. Tracing is not possible if the property has been dissipated (e.g., spent on consumption with nothing to show for it).
• Equitable Bars: Tracing must not produce an inequitable result, especially where innocent volunteers are concerned. Delay can bar relief via laches.

Key Term: Constructive Trust
An equitable mechanism imposed by law requiring a person holding property to hold it for another where it would be unconscionable to assert beneficial ownership (e.g., in knowing receipt or to give effect to proprietary claims identified by tracing).

Tracing Rules

• Clean Substitution: If trust property is sold and the proceeds are used to buy another specific asset, the beneficiary can trace into the new asset as its equitable owner and elect between a proportionate share or a charge, as appropriate.
• Trustee Mixes with Own Funds: If a trustee mixes trust money with their own in an account, equity presumes the trustee spends their own money first (Re Hallett). If the trustee purchases an asset with mixed funds, the beneficiary can claim either a proportionate share of the asset or an equitable charge/lien over it for the amount of trust money used. Equity will also protect the claimant via a rule akin to Re Oatway, allowing claimants to treat a profitable purchase as made with trust funds where necessary to prevent the wrongdoer benefitting from their wrong.
• Mixing Funds of Two Trusts (or Trust and Innocent Volunteer): The traditional rule is "first in, first out" (Clayton’s Case), but courts may apply a rateable sharing approach (Barlow Clowes) if FIFO is impractical or unjust.
• Bank Accounts and Lowest Intermediate Balance: Where money is paid into and out of a mixed bank account, the claimant’s recoverable amount is limited to the lowest intermediate balance after the claimant’s money was paid in. This prevents treating later deposits as restoring dissipated trust money.

Key Term: Equitable Charge (Lien)
A proprietary security over an asset to secure repayment of the claimant’s equitable entitlement; it allows sale and repayment from proceeds up to the secured amount without sharing in any increase in value.

Key Term: Lowest Intermediate Balance
A limitation in tracing into bank accounts whereby a claimant cannot recover more than the lowest balance of the account after misapplied funds were paid in; later credits are not treated as restoring the claimant’s money.

• Backward Tracing in Coordinated Schemes: Equity generally traces forward in time, but courts may allow backward tracing where withdrawals and acquisitions form part of a coordinated scheme designed to defeat claims, linking the use of credit and later trust funds in a single transaction.
• Dissipation: Tracing fails where value is dissipated with nothing identifiable remaining (e.g., holidays, services), though personal liability may still arise against a trustee or knowing recipient.

Key Term: Bona Fide Purchaser for Value Without Notice
An innocent third party who buys property for value (not as a gift) without any knowledge (actual, constructive, or imputed) of any pre-existing equitable claims against it. They take the property free from such claims.

Key Term: Change of Position
A defence available to an innocent volunteer who, in reliance on the receipt, has so altered their position that it would be inequitable to require full restitution (e.g., irreversible expenditure improving their own home).

Key Term: Subrogation
An equitable remedy allowing a claimant whose money was used to discharge another’s secured debt to stand in the shoes of the discharged creditor and assert equivalent security against the debtor’s property.

Mixing with Innocent Volunteers and Re Diplock

Where a trustee pays trust money to an innocent volunteer, the volunteer incurs no personal liability in equity simply by receipt. However, beneficiaries may assert proprietary claims through tracing unless to do so would be inequitable. If trust money is used to improve property already owned by an innocent volunteer (e.g., home renovations), a proprietary claim may be refused where enforcement would be oppressive, though where trust money and the volunteer’s funds are combined to acquire an asset, the beneficiaries can assert a proportionate share. If trust money discharges a mortgage over the volunteer’s property, the beneficiaries may claim by subrogation to the mortgagee’s former security.

Personal Claims against Third Parties

Tracing identifies property for proprietary relief. Separately, equity recognises personal claims against third parties who have dealt with trust property:

Key Term: Knowing Recipient
A recipient is personally liable if they received trust property for their own benefit and had knowledge making it unconscionable to retain it, including actual knowledge or wilfully shutting eyes to the obvious.

Key Term: Dishonest Assistance
A person who dishonestly assists a trustee’s breach of trust incurs personal liability to compensate for loss caused by the breach; no receipt of property is required and the claim is not proprietary.

These personal claims are fault-based and not defeated by difficulties in tracing, but they do not confer proprietary rights and are unavailable against bona fide purchasers.

Key Term: Equitable Charge (Lien)
A proprietary security interest imposed by equity over property to secure repayment of misapplied funds; the claimant is repaid from sale proceeds but does not share in increases in value.

Key Term: Freezing Order
A protective injunction that restrains a defendant from dissipating assets to frustrate a judgment. Granted where there is a good arguable case and a real risk of dissipation.

Key Term: Search Order
An exceptional order permitting a claimant to enter premises to search for and preserve evidence or property at risk of destruction; strict safeguards apply.

Key Term: Undertaking as to Damages
A promise by the applicant for interim relief to compensate the respondent if it is later determined the injunction was wrongly granted and caused loss.

Key Term: Equitable Compensation
Monetary relief to restore the claimant to the position they would have been in but for breach of an equitable duty, commonly used in breach of trust.

Worked Example 1.7

A trustee deposits £10,000 of trust money into his personal account, which already contains £5,000. He later withdraws £12,000 for a holiday and then deposits his salary so the balance rises to £8,000. How much can the beneficiaries trace from the account?

Answer:
The trustee is presumed to spend his own money first, but the claim is limited by the lowest intermediate balance. After the withdrawal, the account dipped below the trust’s contribution. The maximum recoverable from the account is the lowest intermediate balance after the trust funds were paid in, not any later salary credits.

Worked Example 1.8

Trust funds of £20,000 are paid by mistake to V, an innocent volunteer, who spends them improving her home. The beneficiaries seek a proprietary charge over the house. What is the likely outcome?

Answer:
A proprietary claim may be refused where enforcement would be inequitable against an innocent volunteer. V can raise change of position. Subrogation may be available if the trust money discharged a secured debt over the property, but a charge for home improvements will often be refused.

Worked Example 1.9

A fiduciary uses an overdraft to buy shares, then pays trust money into the same account shortly after, repaying the overdraft. Can the beneficiaries trace into the shares?

Answer:
Although backward tracing is generally not allowed, the court may permit it where the steps form part of a coordinated scheme to acquire the asset using credit and then to use trust funds to repay it. If satisfied of such coordination, the beneficiaries may trace into the shares.

Key Term: Bona Fide Purchaser for Value Without Notice
An “equity’s darling” who acquires legal title for value without notice of any equitable interests takes free of them.

Key Term: Injunction
A court order restraining or compelling conduct. Breach is contempt of court.

Key Term: Specific Performance
An order compelling performance of a contractual obligation where damages are inadequate.

Exam Warning

Remember that tracing is a process to identify property, not a remedy. Once property is identified via tracing, the claimant must then seek an appropriate remedy, such as imposing a constructive trust, an equitable charge, subrogation, or claiming equitable compensation. Conversely, personal claims such as knowing receipt and dishonest assistance do not depend on tracing and may succeed even where the property has been dissipated, provided the elements are proved.

Key Point Checklist

This article has covered the following key knowledge points:

• Equitable remedies (injunctions, specific performance, equitable compensation) are discretionary and granted where common law damages are inadequate.
• Courts balance hardship, apply equitable maxims (clean hands, laches), and avoid orders requiring constant supervision or that would be futile or oppressive.
• Interim injunctions are governed by American Cyanamid-style guidelines: serious question to be tried, adequacy of damages on both sides, balance of convenience, and preservation of the status quo; a claimant must give an undertaking as to damages.
• Special injunctions include freezing orders to prevent dissipation of assets and search orders to preserve evidence, granted only on stringent criteria.
• Specific performance compels performance of contractual obligations, typically for unique subject matter like land; it is refused for personal services, where supervision is problematic, or where granting it would cause undue hardship.
• Equitable compensation aims to restore the claimant to their pre-breach position following a breach of equitable duty. It focuses on causation, is assessed with hindsight, and is not confined by common law remoteness rules.
• Trustees may rely on informed consent, limitation (with exceptions), exemption clauses (not for fraud), and discretionary relief where they acted honestly and reasonably.
• Equitable tracing requires a fiduciary relationship and an equitable proprietary interest; it allows following property into mixed funds or substitute assets, subject to equitable bars.
• Tracing into mixed funds engages presumptions (trustee spends own money first), claimant-favouring rules to avoid wrongdoer advantage, and the lowest intermediate balance rule for bank accounts.
• Where funds of multiple claimants are mixed, courts may apply first-in, first-out or rateable sharing depending on fairness and practicality.
• Backward tracing may be permitted in coordinated schemes; tracing fails where assets are dissipated with nothing identifiable remaining.
• Against innocent volunteers, proprietary claims may be limited by change of position; subrogation may be available where trust money discharges secured debts.
• The bona fide purchaser for value without notice defence halts proprietary tracing claims.
• Personal claims against third parties (knowing receipt and dishonest assistance) are distinct from tracing: they are fault-based and impose personal liability but confer no proprietary right.

Key Terms and Concepts

• Clean Hands
• Laches
• Injunction
• Specific Performance
• Equitable Compensation
• Tracing
• Bona Fide Purchaser for Value Without Notice
• Undertaking as to Damages
• Freezing Order
• Search Order
• Constructive Trust
• Equitable Charge (Lien)
• Lowest Intermediate Balance
• Change of Position
• Subrogation
• Knowing Recipient
• Dishonest Assistance