The Judicial Committee Of The Privy Council Confirms The Existence Of 'Backwards Tracing'

The Judicial Committee of the Privy Council (the Privy Council) has today handed down its landmark judgment, in The Federal Republic of Brazil and another (Respondents) -v- Durant International Corporation and another (Appellants) (Jersey) [2015] UKPC35, in which Advocate Paul Nicholls of Walkers appeared for the Appellants. The Privy Council confirmed that it is possible for a claimant to rely on the principle of "backwards tracing" in order to recover an asset, provided that a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, can be established. The question of whether or not "backwards tracing" should be recognised was previously unsettled. Both the Royal Court and the Court of Appeal took the view that the outcome of a case ought properly to depend on its facts as opposed to whether or not the concept of "backwards tracing" is accepted in the abstract, a view endorsed by the Privy Council.

Preamble - Tracing

The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. As Lord Toulson stated in his judgment in the present case, "if it has ceased to exist, it cannot metamorphose into a later property interest. If the money in a bank account has dwindled from £1,000 to £1, only the remaining £1 is capable of being substituted by something else; the £999 has ceased to exist. This explains "the lowest intermediate balance" principle". Similarly, a property interest cannot turn into (or provide a substitute for) something which the holder already has; the later acquisition cannot be the source of the earlier. This explains the "no backward tracing" principle.

The Appeal - facts

The Appellants (Durant and Kildare) were companies registered in the BVI. Kildare was a wholly owned subsidiary of Durant and both companies were, at the relevant time, under the practical control of Mr Paulo Maluf (Mr Maluf) and/or his son Mr Flavio Maluf. From 1993 to 1996 Mr Maluf was mayor of the Municipality of Sao Paulo (the Municipality).

The Appellants appealed to the Privy Council against a decision of the Court of Appeal of Jersey (upholding a decision of the Royal Court) that the companies were liable to the Municipality as constructive trustees of...