UNIVERSITY OF MALAWI
Faculty of Law
FIDUCIARY OBLIGATIONS, EQUITY AND THE RELEVANCE OF THE
EQUITABLE REMEDY OF TRACING IN THE RECOVERY OF BENEFITS
UNJUSTLY OBTAINED BY PUBLIC FUNCTIONARIES IN MALAWI
Mwiza Jo Nkhata Jr.
Assistant Lecturer, Department of Foundational Law, Faculty of law, University of
Malawi
Paper presented at a symposium on “the law and the recovery of benefits unjustly
accruing to public functionaries: Solutions for Malawians,” organised by the
Faculty of Law of the university of Malawi at Protea Ryalls Hotel, Blantyre on 29th –
30th December 2004
1
1.0 INTRODUCTION
This paper aims at highlighting the relevance of the equitable remedy of tracing in as far
as the recovery of benefits unjustly obtained by public functionaries is concerned.
However, since equitable tracing becomes material only where there is a fiduciary
relationship, the paper begins by expounding on the origins, nature and extent of
equitable jurisdiction. This is done merely to recognise the entrenchment of the law of
fiduciary obligations in equity. The paper then goes on to explore the plausibility of the
assertion that public functionaries are fiduciaries and to determine their duties in this
regard. An exposition of the equitable remedy of tracing is then conducted with the
objective of determining whether it has any relevance in the recovery of benefits unjustly
obtained by public functionaries in Malawi.
2.0 EQUITABLE JURISDICTION: ORIGINS, NATURE AND EXTENT
Prior to the Judicature Acts of 1873 and 1875 there were two parallel systems of law
operating in England, each recognising, upholding and applying its own distinct rights
and remedies. The common law courts applied the common law and the Courts of
Chancery applied equity.1Loosely construed equity can, therefore, be understood to refer
to the system of law that was administered by the courts of Chancery prior to the fusion
of law and equity effected by the Judicature Acts.2 It must be realised at the outset that
the Judicature Acts did not do away with the distinction between law and equity.3 On the
contrary it is said that the Acts emphasised rather than diminished the importance of the
principles that had built up equitable jurisprudence.4
1 R. Pearce and J. Stevens, The Law of Trusts and Equitable Obligations (London; Butterworths,
1995) at 3
2 Halsbury's Laws of England, 3rd Ed., Vol 14 (London; Butterworths, 1956) at 462ff
3 Introduction to Trusts and Equity;
http://www.oup.com/uk/booksites/content/019927348/watt_ch01.pdf?version=1
4 Supra, note 2
2
Early authorities on the subject refer to “conscience,” “reason” and “good faith” as the
principles that guided the court of Chancery. Equity comprehensively understood would,
therefore, refer to a system of law which is more consonant than the ordinary law with
opinions current for the time being as to a just regulation of the mutual rights and duties
of men living in civilised society.5 In its early days, equitable jurisdiction was exercised
on an ad hoc basis. Its transformation into a modern system did not come - until after
around 1700, by which time Chancellors tended to be lawyers rather than ecclesiasts and
a system of precedent had begun to develop.6 As equity shook off its ad hoc origins,
several principles developed which became embodied in the form of equitable maxims.
The maxims of equity should be understood as an attempt to formulate in short
condensed sentences the key principles which underlie equitable jurisdiction. The
maxims provide a helpful illustration into some of the recurrent themes in equity and
will often appear as part of the reasoning in judgements.7
Probably the single most important creature of equity is the concept of the trust. If title to
any property is vested in a person as a trustee, equity restrains the trustee from denying
the trust and setting himself up as the absolute owner and imposes upon the trustee
positive duties of good faith towards the beneficiary of the trust.8 An understanding of the
trust concept, particularly as it relates to the law of fiduciary obligations, will be material
to the appreciation of this paper. The concept will, therefore, be examined in greater
detail.
3.0 THE TRUST CONCEPT AND THE FIDUCIARY PRINCIPLE
5 Ibid
6 P. Todd, An Introduction to the Law of Trusts (London ; Financial Training Publications Ltd,
1986) at 10
7
Ibid, some of the most well known equitable maxims are the following;
-equity will not suffer a wrong without a remedy
-equity follows the law
-where the equities are equal the first in time shall prevail
-he who seeks equity must do equity
-equity looks to the intent rather than the form
-he who comes to equity must come with clean hands
8 Supra, note 3
3
It has been said that a 'trust' in English law is in some measure the translation into legal
terms of the word 'trust' as used in ordinary speech. Its conceptual starting point is a
confidence reposed in some other. The confidence so reposed gives rise to moral
obligations to which the courts aided by equity and in some cases the legislature have
purported to develop legal parallels. In a leading textbook on the law of trusts it has been
stated that;
The word 'trust' refers to the duty or aggregate accumulation of
obligations that rest upon a person described as trustee. The
responsibilities are in relation to property held by him, or under his
control. That property he will be compelled by a court in its equitable
jurisdiction to administer in the manner lawfully prescribed by the trust
instrument, or where there is no specific provision written or oral or to
the extent that such provision is invalid or lacking, in accordance with
equitable principles. As a consequence the administration will be in
such a manner that the consequential benefits and advantages accrue
not to the trustee, but to persons called cestui que trust or
beneficiaries…9
The definition by Lewin does indeed with some measure of comprehensiveness outline
the major elements of the trust concept as understood at law. In fact what comes out even
more clearly from the definition is the exposition of the fiduciary nature of the trust
concept. While there are a core number of relationships that are formed between men that
are indisputably fiduciary in nature, the archetype of these is, of course, the trustee and
beneficiary relationship. As has been stated by the courts, however, the categories of
relationships giving rise to fiduciary duties can never be considered as a closed class.10
9Lewin on Trusts (16th Ed, 1964) p 3
10
English v Dedham Vale Properties Ltd [1978] 1 ALL ER 382 at 398 per Slade J; Guerin v The
Queen [1984] 2 S.C.R 335 Per Dickson J.
4
The term fiduciary it has sometimes been stated, is an abstract term but one possessing a
'core' meaning namely that a person in that position is under a duty of loyalty to some
other person or body.11The principle of fiduciary obligation has its origins in the notion of
breach of confidence, one of the original heads of jurisdiction in the Chancery Courts.12In
LAC Minerals v International Corona Ltd 13, La Forest J. identified three instances in
which the term 'fiduciary' tends to be used. The first instance is in what he terms as the
traditional categories of fiduciaries. Secondly, in cases of a specific fiduciary duty arising
on the facts and the third instance is the remedial or fictional fiduciary relationship. The
categorisation by La Forest J. merely serves to highlight the fact that there can be
different bases for founding a fiduciary relationship. That notwithstanding, it is generally
accepted that in all fiduciary relationships the fiduciary "agrees to act for or on behalf of
another person in the exercise of a power or discretion which will affect the interests of
another person in a legal or practical sense." 14Inevitably in all fiduciary relationships the
beneficiary is particularly vulnerable and heavily reliant on the fiduciary's loyalty and
good faith in the discharge of his duties.15
The trust notion should be understood to be merely one device under the broad umbrella
of the social trust concept. A social trust has been usefully defined as ;
A trust in a broad moral sense involving reliance, in social relationships
on other people's good will, solicitude and competence; or a confidence
that general expectations in familiar social circumstances will not be
frustrated.16
11 G. Moffat, Trusts Law: Text and Materials (London: Butterworths, 1994) at 545
12 L.S. Sealy, " Fiduciary Realationships", Cambridge Law Journal, [1962] at 69
13
(1989) 61 DLR (4th) 14 at 27
14 Hospital Products v United States Surgical Corporation [1984] 156 CLR 41 Per Mason J
15 M. Nkhata, Good Governance and the Utility of Social Trust Based Notions to the Malawi
Poverty Reduction Strategy, LLB (Hons) Dissertation (Zomba; 2003)
16
R. Cotterrell, " Trusting in Law: Legal and Moral Concepts of Trust," (1993) 46 Current Legal
Problems, Part 2: Collected Papers, (Eds. M.D.A. Freeman and B.A Hepple) 75
5
As evident from the definition, interdependence and altruism constitute the foundation of
any social trust based relationship. At the core of all social trust based relationships is the
reposition of faith and confidence by an individual(s) (often also called beneficiaries or
cestui que trust) in another individual(s) (otherwise called trustees or loosely called
fiduciaries) for the performance of duties and management of resources for the benefit of
the beneficiaries. The crux of the matter is that all social trust based notions employ
fiduciary principles in regulating the relationship between the parties.
4.0 ARE PUBLIC FUNCTIONARIES FIDUCIARIES?
Agents of the state involved in the discharge of public duties can aptly be referred to as
public functionaries. Under the constitution of the Republic of Malawi " all persons
responsible for the exercise of powers of state do so on trust and shall only exercise such
power to the extent of their lawful authority and in accordance with their responsibilities
to the people of Malawi."17 As is evident the provision outlines three major items. First,
the basis of all state power is the trust of Malawians in the authorities. Secondly, this
power must be exercised only to its lawful extent and thirdly, in the exercise of their
powers the authorities must always consider their responsibilities to the people of
Malawi.
Further, section 13 of the Malawi constitution requires the state to actively promote the
welfare and development of the people of Malawi by progressively adopting and
implementing policies and legislation aimed at, among other things, enhancing public
trust, good governance and sound economic management.18 The state is also enjoined to
strengthen confidence in public institutions by introducing measures that guarantee
accountability, transparency, personal integrity and financial probity.
An important consequence of the placement of the duties such as those in section 13 and
12 of the constitution of the Republic of Malawi is that the duty bearer must be
17
Section 12
18 The Constitution of the Republic of Malawi section 13(o) and 13(n)
6
recognised as a fiduciary - a person in whom others repose faith for a certain undertaking
or power.19 According to Kasambara, in the context of Malawi, what becomes apparent is
that the framers of the constitution were only prepared to have rulers who would be
trustees and that should these “politician trustees” act outside the trust they would be
liable to censure.20 It becomes clear that in Malawi public functionaries are undoubtedly
fiduciaries. Even though the law may not have expressly declared them as such, the
nature of their duties establishes their fiduciary role beyond doubt.
The primary importance of recognising someone as a fiduciary is that the person so
recognised becomes subject to principles of the law of fiduciary obligations in the
discharge of his duties. Where one is recognised as a fiduciary the law of fiduciary
obligations regulates his/her conduct in the discharge of duties. In the case of public
functionaries, this means that over and above their ordinary official duties they must
always observe the three fiduciary duties sometimes called the principles of fiduciary
management.
The first principle is that a fiduciary must not place himself/herself in a position where
personal interest might conflict with duty. The established test here is to determine
whether the fiduciary has entered into engagements in which he/she can have a personal
interest conflicting with the interests of his/her principal or beneficiary.21The second
principle requires the fiduciary to manage resources of his/her principal prudently. In the
words of Jessel MR this requires the fiduciary to "conduct the business of the trust in the
19 G.S Kamchedzera, Democratic Accountability, Well Being, Policy and Leadership's Compliance
with Human Rights Principles, Paper Presented at a workshop on " Constitutionalism and
Democratic Accountability in Malawi and South Africa; Ten Years After Change," Blantyre; 12 -13th
July 2003, (Unpub)
20 R.Z.M Kasambara, Constitutionalism and Democratic Accountability During the Multiparty
Decade in Malawi: Challenges and Opportunities for the Civil Society, Paper presented at a
workshop on " Constitutionalism and Democratic Accountability in Malawi and South Africa: Ten
Years After Change," Blantyre; 12-13th July 2003 (Unpub)
21
Aberdeen Railway Company v Blaikie Brothers [1854] 1 Macq 461 at 471; Bray v Ford [1896]
AC 44 at 51
7
same manner that an ordinary man of business would conduct his own."22 The third
principle requires the fiduciary to act fairly to those that are entitled to benefit from
his/her exercise of duty. The effect of this principle is that the fiduciary is bound to hold
an even hand among beneficiaries and not to favour one as against the other.23
The reposition of trust, reliance and expectation that is placed in those in positions of
trust i.e. public functionaries, entails “reliance in social relationships on other people's
good will, solicitude and competence that general expectations in familiar social
circumstances will not be frustrated."24In the event that the reliance and expectation has
been frustrated, there arises the need for the fiduciary to explain or give an account of the
breach. The strength of the law of fiduciary obligations is that it avails the beneficiaries -
those who have reposed trust, reliance and expectation - various remedies by which they
can discipline a wrongdoing fiduciary. The beneficiaries always have the full support of
the law in seeking to enforce the fiduciary's duties. The scope of the present paper,
however, allows us only to examine the equitable remedy of tracing amongst the various
remedies that the beneficiaries can avail themselves.
5.0 THE EQUITABLE REMEDY OF TRACING
Any beneficiary of a fiduciary relationship will be keen to find out what would happen if
a fiduciary, either through incompetence or with fraudulent intent, acted in breach of his
fiduciary obligations. Obviously the beneficiary would want to find out how he/she can
be protected from the ensuing loss or how he can redeem his loss in such circumstances.
It is in this regard that tracing becomes relevant.
Although there still remains a debate a to whether “tracing” can appropriately be termed a
remedy, it basically refers to a proprietary claim/action which entitles the beneficiaries or
those who have the rights of beneficiaries to claim direct recourse against specific
22 Speight v Gaunt (1883) 22 Ch D 727 at 739
23
Lloyds Bank v Duker [1987] WLR 1324 at 1330-31
24 Supra, note 16
8
property, a portion thereof or property considered the equivalent of trust property, from
the trustee on the basis that the subject property remains his property by virtue of the
trust.25 Looked at as a remedy equitable tracing is a proprietary remedy as contrasted to
the other personal remedies that a beneficiary can avail himself. Whereas a personal
remedy is enforceable only against the person against whom it was awarded, a proprietary
remedy is granted in relation to a specific asset and is enforceable against any holder of
that asset unless for some reason it ceases to exist or the claim is no longer enforceable.26
Availing beneficiaries a proprietary claim against wrongdoing fiduciaries has three main
advantages over the personal remedies. Firstly, in the event of the insolvency of the
fiduciary, a plaintiff with a proprietary claim gains priority over the general creditors.
Secondly, a plaintiff may opt to utilise a proprietary claim because if he can identify a
particular asset that has increased in value since the breach of trust, he can claim the asset
together with the increase in value. Thirdly, where a personal action is barred for any
reason, a proprietary action is to be preferred.27
5.1 The Requirements for Equitable Tracing and Scope of the Remedy
It is clear on the authorities that the major prerequisite for equitable tracing is that there
must be an initial fiduciary relationship before a claim can be maintained against the
identified property.28 This position is quite settled in English law and was recently
affirmed in Agip (Africa) Ltd v Jackson.29 The court in this case stated that;
Equity… will follow money into a mixed fund and charge the fund.
There is, in the present case, no difficulty about the mechanics of
tracing in equity. The money can be traced through various bank
25 Remedies of Beneficiaries and of Third Parties Following Breach of Trust :http://
www.archivioceradi.luis.it/document;/archivioceradi.impresa/comparato/sebastianutti.pdf.
26 Supra, note1 at 515
27 Supra, note 1 at 517
28
Re Hallett's Estate (1880) 13 Ch. D 696
29 [1992] 4 ALL ER 451
9
accounts to Baker Oil and onwards. It is, however, a pre-requisite of the
remedy in equity that there must be a fiduciary relationship which calls
the equitable jurisdiction into being…30
The requirement as has been expounded by the courts is that there should have existed at
some point in time a fiduciary relationship to give rise to the right to trace property.31It is
clear, however, that the fiduciary relationship that is essential to tracing can be generated
by the very circumstances that give rise to the need to trace. Strictly speaking there is no
need for the fiduciary relationship to arise from a consensual transaction.32There is,
therefore , no need to have a pre-existing fiduciary relationship between the parties to the
action before the property which is being traced is transferred wrongfully.
Equitable tracing has also been said to rest on the retention of equitable title by the
original owner of the property. The reason that a beneficiary can trace into the hands of a
wrongdoer who receives trust property, it is argued, is because he has not lost his
equitable right to the property and by tracing he is merely asserting it.33
Although the rules of equitable tracing are very flexible, the law will only allow a
beneficiary to assert claims to property so long as the original property or property
derived form it continues to be ascertainable. The rules of equitable tracing as developed
by the courts enable beneficiaries in a particular case to determine whether the property
the subject of the action can be said to be ascertainable or not.
5.2 Limits to Equitable Tracing
There can be no tracing where the property that has been lost by the beneficiaries has
been dissipated or used up. This is because it cannot be said, in such a situation, that there
30 Ibid per Fox LJ at 466
31 Sinclair v Broughman [1914] AC 398
32
Chase Manhattan Bank NA v Israeli British Bank (London) Ltd [1981] Ch 105
33 Supra, Note 1 at 535
10
exists assets that represent the original property.34It is also generally recognised that there
can be no tracing into unascertained goods. This is particularly the case where trust
property is used to purchase unascertained goods.35The third instance in which the right to
trace can be limited is where the property has been transferred into the hands of a bona
fide purchaser for value without notice ( a BFP). This is so because the right to trace
being equitable is defeated by the equity of a BFP. Fourthly, since tracing is based in
equity, where the circumstances reveal that it will be inequitable to trace, the beneficiary
will not be allowed to trace.36
6.0 EQUITABLE TRACING, PUBLIC FUNCTIONARIES AND THE LAW IN
MALAWI
Clearly, the legal system in Malawi has tended to prefer employing criminal law based
methods in dealing with cases of benefits unjustly obtained by public functionaries.
Noteworthy in this regard are the provisions of the Penal Code dealing with matters of
corruption and the abuse of public office.37 Further the whole tenor of Corrupt Practices
Act38 reveals that it is criminal law and the remedies available within it that have been
detailed to deal with matters of unjust acquisition of benefits by members of the citizenry.
A cursory look at what the criminal law has to offer in this regard will show that its most
prominent feature is the imposition of custodial sentences for the offences if they are
proved. Restitution is hardly ever an option. This, therefore, largely obliterates the
possibility of recovering any or part of the property that was unjustly obtained by a
particular public functionary.
In our opinion this is not a very pleasant state of affairs particularly where public
functionaries are concerned. Public functionaries it must be remembered are almost
34 Re Goldcorp Exchange Ltd [1994] 2 ALL ER 806
35 Re London Wine Company (Shippers) Ltd [1975]125 NLJ 977
36
[1948] Ch 465
37
Cap. 7:01 of the Laws of Malawi , Sections 90 -100
38 No. 18 of 1995
11
always in charge of state resources of great magnitude. Where what a particular public
functionary has misappropriated is of considerable value, we believe it would be prudent
to adopt means/methods that can guarantee the recovery of at least part or all of the unjust
benefit. The obvious advantage of employing such a method is that the benefit that had
been improperly been acquired would be returned to the fund for a proper distribution.
Where there has been an increase in the value of the asset, the increment can also be
claimed on behalf of the beneficiary.
Bearing in mind the fact that Malawi "received English law" on the 11th day of August
190239 the applicability of equitable doctrines within the legal system is not a matter of
great controversy. On the basis of our exposition of the nature of equity, the trust concept
and the fiduciary obligation it is evident that equitable tracing can be employed in dealing
with public functionaries that have misappropriated benefits intended for the citizenry.
The starting point, obviously, is to acknowledge that public functionaries in Malawi stand
in a fiduciary relationship vis-à-vis the citizenry. This means that public functionaries
owe the citizenry in Malawi fiduciary obligations and they must always observe the three
fiduciary principles in the discharge of their duties. As highlighted earlier on, the three
core fiduciary principles entail the following three things; no conflict of interest rule,
prudence and prevention of bias. Put briefly, the fiduciary principles require all public
functionaries in Malawi not to allow their own personal interest to conflict with their
duties. Secondly, the public functionaries are also enjoined to prudently manage all state
resources and also to avoid bias in dealing with state resources.
The failure by a fiduciary to observe any one of the fiduciary principles automatically
entitles the beneficiary to activate any of the various remedies created by law. Upon
establishing a misappropriation of property resources, one alternative would be to trace
the benefit so acquired and return it to its proper beneficiaries.
39 Article 15 of the British Central Africa Order in Council, 1902
12
An extra advantage that would be had by employing tracing relates to the versatility of
tracing as a remedy. The remedy is still available even where the property that was
initially wrongfully acquired by the fiduciary has changed form. Tracing can still be
conducted even where the property that has changed form i.e. if the property is converted
into money, the law allows a proper plaintiff to follow it into whatever form it has been
converted.40 Clearly, tracing is a more efficacious remedy in as far the recovery of
benefits unjustly acquired by public functionaries is concerned. In this regard the options
offered by the criminal law pale considerably in their efficaciousness.
As a matter of illustration, the fact that the fiduciary has mixed assets unjustly obtained
together with his personal assets is no limitation/bar to tracing. The position at law is that
the beneficiaries, in such a case will have a first charge over the mixed fund or any
property that is purchased from it, to the extent necessary to fulfil their claim. 41
7.0 FINAL REMARKS
State resources are clearly meant for the benefit of the entire citizenry. Where a few
individuals who are entrusted with the management of these resources misappropriate the
same, the citizenry suffers a detriment. Although the criminal law may offer sanctions, in
the form of custodial sentences, to such offenders, the harm occasioned to the citizenry
may still be too great and sometimes incommensurate to the penalty imposed by the
criminal law. It is, therefore, worthwhile to attempt to recover as much of the benefit that
was unjustly acquired as possible. It is in this regard that tracing and the law of fiduciary
obligations becomes relevant to the question of recovering benefits wrongfully accruing
to public functionaries through a breach of their duties.
40
Taylor v Plummer (1815) 3 M & S 562
41 Supra, note 11 at 427
13
