A constructive trust is an
equitable remedy Equitable remedies are judicial remedies developed by courts of equity from about the time of Henry VIII to provide more flexible responses to changing social conditions than was possible in precedent-based common law.
Equitable remedies were gra ...
imposed by a
court
A court is any person or institution, often as a government institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in acco ...
to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to
unjust enrichment
In laws of equity, unjust enrichment occurs when one person is enriched at the expense of another in circumstances that the law sees as unjust. Where an individual is unjustly enriched, the law imposes an obligation upon the recipient to make re ...
or interference, or due to a breach of
fiduciary duty
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
, which is intercausative with unjust enrichment and/or property interference. It is a type of
implied trust An implied trust is an element of trust law, and refers to a trust that has not been "expressly created by the settlor." There are two types of implied trust:
*Resulting trust
*Constructive trust
A constructive trust is an equitable remedy imp ...
(''i.e.'', it is created by conduct, not explicitly by a settlor).
Definition
Constructive trusts are imposed by operation of law. They are also referred to as implied trusts. They are not subject to formality requirements. Unlike a resulting trust, which also arises by operation of law, a constructive trust does not give effect to the imputed/presumed intention of the parties.
Instead, constructive trusts are largely said to be triggered by unconscionability. This is the idea that a defendant would be unjustly enriched if they were allowed to keep property for themselves. The main issue with this argument is that we would have to have a really broad approach to unjust enrichment in order for a constructive trust to come under that underpinning concept in order for us to understand constructive trust. This statement is incoherent and without any basis in law or fact.
Events generating constructive trusts
Breach of fiduciary duty
In a constructive trust the
defendant breaches a duty owed to the
plaintiff
A plaintiff ( Π in legal shorthand) is the party who initiates a lawsuit (also known as an ''action'') before a court. By doing so, the plaintiff seeks a legal remedy. If this search is successful, the court will issue judgment in favor of t ...
. The most common such breach is a breach of
fiduciary duty
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
, such as when an
agent
Agent may refer to:
Espionage, investigation, and law
*, spies or intelligence officers
* Law of agency, laws involving a person authorized to act on behalf of another
** Agent of record, a person with a contractual agreement with an insuranc ...
wrongfully obtains or holds property owned by a
principal.
A controversial example is the case of ''
Attorney General for Hong Kong v Reid
was a Court of Appeal of New Zealand, New Zealand-originated trust law case heard and decided by the Judicial Committee of the Privy Council, where it was held that bribe money accepted by a person in a position of trust, can be traced into any ...
'', in which a senior
prosecutor took bribes not to prosecute certain offenders. With the bribe money, he purchased property in
New Zealand
New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
. His employer, the
Attorney-General
In most common law jurisdictions, the attorney general or attorney-general (sometimes abbreviated AG or Atty.-Gen) is the main legal advisor to the government. The plural is attorneys general.
In some jurisdictions, attorneys general also have exec ...
, sought a declaration that the property was held on constructive trust for it, on the basis of breach of fiduciary duty. The
Privy Council awarded a constructive trust. The case is different from ''
Regal (Hastings) Ltd v Gulliver
, is a leading case in UK company law regarding the rule against directors and officers from taking personal advantage of a corporate opportunity in violation of their duty of loyalty to the company. The Court held that a director is in breach ...
'', because there was no interference with a profit-making opportunity that properly belonged to the prosecutor.
Being a Privy Council decision, ''Reid'' did not overrule the previous decision of the
Court of Appeal of England and Wales
The Court of Appeal (formally "His Majesty's Court of Appeal in England", commonly cited as "CA", "EWCA" or "CoA") is the highest court within the Senior Courts of England and Wales, and second in the legal system of England and Wales only to ...
in ''Lister v Stubbs'' which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the claimant not enjoyed by the defendant's other creditors. In the event of the defendant's insolvency, the trust assets are untouchable by the general creditors. Supporters of ''Lister'' suggested that there was no good reason to put the victim of wrongdoing ahead of other creditors of the estate. There was a tension in English law between ''Lister'' and ''Reid'' which was highlighted in ''
''. The
United Kingdom Supreme Court
The Supreme Court of the United Kingdom (initialism: UKSC or the acronym: SCOTUK) is the final court of appeal in the United Kingdom for all civil cases, and for criminal cases originating in England, Wales and Northern Ireland. As the United ...
subsequently overruled ''Sinclair'' in ''
FHR European Ventures LLP v Cedar Capital Partners LLC
is a landmark decision of the United Kingdom Supreme Court which holds that a bribe or secret commission accepted by an agent is held on trust for his principal. In so ruling, the Court partially overruled '' Sinclair Investments (UK) Ltd v Vers ...
'', holding that ''Lister'' was no longer good law.
Property interference
In ''
Foskett v McKeown
is a leading case on the English law of trusts, concerning tracing and the availability of proprietary relief following a breach of trust.
Facts
In breach of trust, Mr Murphy took £20,440 from a company he controlled. Over 200 investors ( ...
'' a trustee used
trust money together with some of his own money to purchase a
life insurance policy. Then he committed suicide. The insurance company paid out to his family. The defrauded beneficiaries of the trust sought a declaration that the proceeds were held on constructive trust for them. The
House of Lords
The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminste ...
said that the beneficiaries could choose between either: (a) a constructive trust over the proceeds for the proportion of the life insurance payout purchased with their money; or (b) an
equitable lien over the fund for the repayment of that amount.
There is controversy as to what the true basis is of this trust. The House of Lords said that it was to vindicate the plaintiffs' original proprietary rights. However, this reasoning has been criticized as tautologous by some scholars who suggest the better basis is unjust enrichment (see below). This is because there must be a reason why a new property right is created (i.e. the trust) and that must be because otherwise the family would be unjustly enriched by receiving the proceeds of the insurance policy purchased with the beneficiaries' money. "Interference with the plaintiff's property" can justify why the plaintiff can get its property back from a thief, but it cannot explain why new rights are generated in property for which the plaintiff's original property is swapped.
In ''Foskett v McKeown'', the plaintiff's original property was an interest in the trust fund. The remedy they obtained was a constructive trust over an insurance payout. It is not obvious why such a new right should be awarded without saying it is to reverse the family's unjust enrichment.
Unjust enrichment
In ''
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd
''Chase Manhattan Bank NA v Israel-British Bank (London) Ltd'' 981Ch 105 is an English trusts law case, concerning constructive trusts. It held that a trust arose to protect a payment made under a mistake, with the benefit of a proprietary re ...
'' one bank paid another bank a large sum of money by mistake (note that the recipient bank did not do anything wrong – it just received money not owed to it).
Goulding J held that the money was held on (constructive) trust for the first bank. The reasoning, in this case, has been doubted, and in ''
Westdeutsche Landesbank Girozentrale v Islington London Borough Council'' the House of Lords distanced itself from the idea that unjust enrichment raises trusts in the claimant's favour. This remains an area of intense controversy.
These type of trusts are called '"institutional" constructive trusts'. They arise the moment the relevant conduct (breach of duty, unjust enrichment etc.) occurs. They can be contrasted with '"remedial" constructive trusts', which arise on the date of judgment as a remedy awarded by the court to do justice in the particular case.
An example is the Australian case ''
Muschinski v Dodds''. A
de facto
''De facto'' ( ; , "in fact") describes practices that exist in reality, whether or not they are officially recognized by laws or other formal norms. It is commonly used to refer to what happens in practice, in contrast with ''de jure'' ("by la ...
couple lived in a house owned by the man. They agreed to make improvements to the property by building a pottery shed for the woman to do arts and crafts work in. The woman paid for part of this. They then broke up. The
High Court held that the man held the property on constructive trust for himself and the woman in the proportions in which they had contributed to the improvements to the land. This trust did not arise the moment the woman commenced improvements – that conduct did not involve a breach of duty or an unjust enrichment etc. The trust arose at the date of judgment, to do justice in the case.
In ''Bathurst City Council v PWC Properties'', the High Court that as constructive trusts are the most severe remedy in cases of breach of fiduciary duty, they should only be imposed when other remedies are inappropriate in providing relief.
Common intention constructive trusts
Common intention constructive trusts consider the intention of the parties. This is significantly found in the familial context. For example, do the cohabitants have a beneficial interest in their home? Here, equity will follow the law.
Following ''
Stack v Dowden'' equity will look at the registered owner as a property and then distribute it in those proportions.
[ For example, if the parties had joint legal ownership of a property, then there is a strong presumption that they have a beneficial interest. However, in most cases with the cohabitants, one person has legal title. In that case, the sole owner would be presumed to have sole beneficial ownership. This can be problematic in circumstances where the other cohabitant (the one who doesn't have title) does a lot to improve the property or just contribute to it in some way.
This can, however, be rebutted if there was common intention to hold the property differently. In such cases, the courts will find a constructive trust in those proportions.
]
Actual, inferred and imputed intention
If there is no evidence of actual intention, the courts will search of inferred or imputed intention. In '' Jones v Kernott'' the Supreme Court inferred intention to the parties. Therefore, imputed intention involves a lot more judicial discretion, whereas inferred intention is still supposed to be based on the conduct between the parties.
Joint venture
The focus here is the joint venture between the claimant and the defendant. For there to be a joint venture it would be unconscionable for the defendant to deny the other party's beneficial interest in the property.
The three main requirements for a joint venture constructive trust are; (1) an arrangement or understanding between the parties; (2) reliance on that arrangement or understanding; and (3) an inconsistent act.
Vendor under a specifically enforceable contract for sale
The seller holds land on a constructive trust for the purchaser. However, this is limited. In '' Rayner v Preston'' the claimant had purchased a property from the defendant, but the house was then destroyed in the fire before they could move in. The defendant received a big payout from the insurance company and refused to give that money to the claimant. It was held that the claimant was not entitled to the payout because it was not the trust property, and because of the nature of the dispute, the trustee only had a low standard of care, particularly when you compare it to an express trustee.
The purchaser also cannot transfer their beneficial interest before receiving legal title.
Voluntary transactions made by mistake
The court can set aside a gift or disposition where the transfer was made by mistake. The property must have been transferred by deed not an oral agreement.[''Lady Hood of Avalon v Mackinnon'' ]909
__NOTOC__
Year 909 ( CMIX) was a common year starting on Sunday (link will display the full calendar) of the Julian calendar.
Events
By place
Britain
* King Edward the Elder and his sister, Princess Æthelflæd of Mercia, raid Danish ...
1 Ch 476, 484
Usefulness of constructive trusts
For example, if the defendant steals $100,000 from the plaintiff and uses that money to buy a house, the court can trace the house back to the plaintiff's money and deem the house to be held in trust for the plaintiff. The defendant must then convey title to the house to the plaintiff, even if rising property values had appreciated the value of the house to $120,000 by the time the transaction occurred. If the value of the house had instead ''depreciated'' to $80,000, the plaintiff could demand a remedy at law (money damages equal to the amount stolen) instead of an equitable remedy.
The situation would be different if the defendant had mixed his own property with that of the plaintiff, for example, adding $50,000 of his own money to the $100,000 stolen from the plaintiff and buying a $150,000 house or using plaintiff's $100,000 to add a room to defendant's existing house. The constructive trust would still be available but in proportion to the contributions, not wholly in the claimant's favour. Alternatively, the claimant could elect for an equitable lien instead, which is like a mortgage over the asset to secure repayment.
Because a constructive trust is an equitable device, the defendant can raise all of the available equitable defenses against it, including unclean hands, laches, detrimental reliance, and undue hardship An undue hardship is an American legal term referring to special or specified circumstances that partially or fully exempt a person or organization from performance of a legal obligation so as to avoid an unreasonable or disproportionate burden or o ...
.
See also
* Constructive trusts in English law
Constructive trusts in English law are a form of trust created by the English law courts primarily where the defendant has dealt with property in an "unconscionable manner"—but also in other circumstances. The property is held in "constructiv ...
Notes
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Equity (law)
Wills and trusts
Judicial remedies