Background
Facts
Decision
Comment


Background

At the end of last year, the Royal Court delivered a landmark judgment concerning the circumstances under which proprietary claims may be established and assets traced (for further details please see "Tracing a new path: court delivers landmark judgment on asset tracing"). The Court of Appeal has now endorsed the approach taken by the Royal Court.(1)

In so doing, the Court of Appeal has expressly acknowledged that in future the court will be making an evaluative judgment where it is asked to treat one asset as representing or being a substitute for the plaintiff's original property.

Facts

The Federal Republic of Brazil and the Municipality of Sao Paolo claimed against approximately $10.5 million that had been paid into bank accounts of the defendants in Jersey. The funds were alleged to have been the traceable proceeds of bribes received by the former mayor of Sao Paolo, Paulo Maluf, and his son Flavio during the mayor's time in office.

The plaintiffs claimed that the funds had made their way to Jersey via unidentified black-market currency dealers in Brazil (Doleiros) and an account beneficially owned and controlled by the Malufs in New York. The claim was not for damages, but rather for the recovery of the funds on the grounds that the defendants were constructive trustees of the funds received by them with knowledge of their tainted origin, or alternatively on grounds of unjust enrichment or a proprietary claim to the funds.

Decision

The Court of Appeal started by making general observations on tracing. The court stated that it was being asked to identify an asset that represented the plaintiff's property (ie, it was being asked to treat an asset that was not in reality the plaintiff's original property as being a substitute for that property).

The court therefore underlined that in any one case, a court will be making an evaluative judgment and not applying a hard-edged rule. The court expressly stated that it was making a policy choice as to whether the law was prepared to recognise that one asset represented another.

The court further distinguished between property rights, which are hard-edged, and tracing. It defined 'tracing' as a means of vindicating such rights (ie, a remedy to give effect to a right, not a right itself).

The Court of Appeal therefore endorsed the approach of the Royal Court and stated that in exercising its tracing jurisdiction, the court will be concerned in practice more with questions of evidence than questions of principle.

The Court of Appeal also confirmed the Royal Court's rejection of the English approach and stated that the law of Jersey should and does recognise tracing as a unitary concept unencumbered by the burden of history that has complicated the position in England.

The Court of Appeal specifically considered a number of points, as follows.

To succeed in a tracing claim, a plaintiff must establish a necessary link between the plaintiff's original property and the amount claimed. The Court of Appeal did not seek to define any rules as to what was meant by a necessary link or connection; rather, it was a matter to be dealt with on a case-by-case basis.

The Court of Appeal confirmed the Royal Court's approach that there was no need to restrict the scope of the evidential test by applying a lower intermediate balance principle. This principle is founded on the concept that a plaintiff is entitled to trace only the lowest value of the money held between the date of misappropriation of the plaintiff's money and the date on which the claim is brought. The Court of Appeal commented that such a scenario would mean that a plaintiff could face considerable, but not necessarily insuperable difficulties in establishing the necessary connection.

The Court of Appeal took a similar approach in relation to backwards tracing. In particular, the court stated that a plaintiff that sought to trace into an asset that had been acquired by means of a payment from an account before that account had received any trust property said to have come from the plaintiff would face considerable difficulties in establishing the necessary link. Again, the issue was seen as an evidential one, not an application of a principle.

The court therefore reconfirmed that the approach was one of evidence rather than any question of theory or doctrine. In particular, it endorsed the issue as being whether there was sufficient evidence to establish a link between the original property and the property into which a plaintiff was seeking to trace.

On the fact of the case, the Court of Appeal confirmed the decision of the Royal Court and rejected all grounds of appeal.

Comment

The wider implications of the Royal Court and Court of Appeal decisions remain to be seen. In particular, it is unclear as to how the Jersey court will decide what evidence is sufficient to show a necessary connection in future. It is also unclear what will happen where there are questions of:

  • insolvency;
  • prejudice to unsecured creditors;
  • the involvement of third parties acquiring assets for value; or
  • multiple victims of fraud.

For those holding assets for others - whether as banker, trustee, custodian or fund manager - this judgment underlines the importance of understanding the ultimate source of funds received. Without such an understanding, any financial institution is at risk of finding itself drawn into complex legal and regulatory claims, including personal claims for paying away assets that might be found to belong to third parties.

Whether the case will be appealed further to the Supreme Court is unknown at this stage. If so, it would be an opportunity for the court to evaluate the Jersey approach, as well as to reconsider the English position.

For further information on this topic please contact Matthew Thompson, Edward Mackereth or Shaun Maloney at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (matthew.thompson@ogier.com, edward.mackereth@ogier.com or shaun.maloney@ogier.com).

Endnotes

(1) The Federal Republic of Brazil v Durant International Corporation.