In trust law, a constructive trust is an equitable remedy imposed by a court 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 or interference, or due to a breach of fiduciary duty, which is intercausative with unjust enrichment and/or property interference.[1][2] It is a type of implied trust (i.e., it is created by conduct, not explicitly by a settlor).
In the United States (in contrast to England), a constructive trust remedy generally does not recognize or create any continuing fiduciary relationship — that is, a constructive trust is not actually a trust except in name. Rather, it is a fiction declaring that the plaintiff has equitable title to the property at issue, and ordering the defendant to transfer legal ownership and possession to the plaintiff.[3] For instance, in some states the slayer rule is implemented in the form of a constructive trust.
Definition
Constructive trusts are imposed by operation of law. They are also referred to as implied trusts. They are not subject to formality requirements.[4] 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.[5]
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.[6] 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. The most common such breach is a breach of fiduciary duty, such as when an agent wrongfully obtains or holds property owned by a principal.[7] A controversial example is the case of Attorney General for Hong Kong v Reid,[8] in which a senior prosecutor took bribes not to prosecute certain offenders. With the bribe money, he purchased property in New Zealand. His employer, the Attorney-General, 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,[9] because there was no interference with a profit-making opportunity that properly belonged to the prosecutor.[10]
Being a Privy Council decision, Reid did not overrule the previous decision of the Court of Appeal of England and Wales in Lister v Stubbs[11] 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 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.[12] The United Kingdom Supreme Court subsequently overruled Sinclair in FHR European Ventures LLP v Cedar Capital Partners LLC,[13] holding that Lister was no longer good law.
Property interference
In Foskett v McKeown[14] 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 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.[15]
Unjust enrichment
In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd[16] 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.[17] A de facto 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.[18][19] 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.[19] 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. This kind of trust is based on bargain between the claimant and the defendant, as opposed to aspects such as proprietary rights which are based on the word of the defendant to the claimant leading to their reliance on the word hence leading to detriment suffered by the claimant.
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.[20]
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.[21]
Vendor under a specifically enforceable contract for sale
The seller holds land on a constructive trust for the purchaser.[22] 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.[23]
The purchaser also cannot transfer their beneficial interest before receiving legal title.[24]
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.[25]
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.
↑ Virgo, Graham (2006). The Principles of the Law of Restitution 2nd edn. Oxford Clarendon Press. pp.606–607.
↑ Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. b (2010) (“[E]very judicial order recognizing that ‘B holds X in constructive trust for A’ may be seen to comprise, in effect, two remedial components. The first of these is a declaration that B’s legal title to X is subject to A’s superior equitable claim. The second is a mandatory injunction directing B to surrender X to A or to take equivalent steps.”).
↑ Scott v Southern Pacific Mortgages Ltd & Ors[2014] UKSC 52, [2014] HLR 48, [2014] 3 WLR 1163, [2014] WLR(D) 447, [2015] 1 AC 385, [2015] 1 All ER 277(22 October 2014), Supreme Court (UK)
↑ Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476, 484.
Related Research Articles
Restitution and unjust enrichment is the field of law relating to gains-based recovery. In contrast with damages, restitution is a claim or remedy requiring a defendant to give up benefits wrongfully obtained. Liability for restitution is primarily governed by the "principle of unjust enrichment": A person who has been unjustly enriched at the expense of another is required to make restitution.
A legal remedy, also referred to as judicial relief or a judicial remedy, is the means with which a court of law, usually in the exercise of civil law jurisdiction, enforces a right, imposes a penalty, or makes another court order to impose its will in order to compensate for the harm of a wrongful act inflicted upon an individual.
In common law jurisdictions, a misrepresentation is a false or misleading statement of fact made during negotiations by one party to another, the statement then inducing that other party to enter into a contract. The misled party may normally rescind the contract, and sometimes may be awarded damages as well.
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.
Tracing is a legal process, not a remedy, by which a claimant demonstrates what has happened to his/her property, identifies its proceeds and those persons who have handled or received them, and asks the court to award a proprietary remedy in respect of the property, or an asset substituted for the original property or its proceeds. Tracing allows transmission of legal claims from the original assets to either the proceeds of sale of the assets or new substituted assets.
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across the Commonwealth and the United States. Trusts developed when claimants in property disputes were dissatisfied with the common law courts and petitioned the King for a just and equitable result. On the King's behalf, the Lord Chancellor developed a parallel justice system in the Court of Chancery, commonly referred as equity. Historically, trusts have mostly been used where people have left money in a will, or created family settlements, charities, or some types of business venture. After the Judicature Act 1873, England's courts of equity and common law were merged, and equitable principles took precedence. Today, trusts play an important role in financial investment, especially in unit trusts and in pension trusts. Although people are generally free to set the terms of trusts in any way they like, there is a growing body of legislation to protect beneficiaries or regulate the trust relationship, including the Trustee Act 1925, Trustee Investments Act 1961, Recognition of Trusts Act 1987, Financial Services and Markets Act 2000, Trustee Act 2000, Pensions Act 1995, Pensions Act 2004 and Charities Act 2011.
An account of profits is a type of equitable remedy most commonly used in cases of breach of fiduciary duty. It is an action taken against a defendant to recover the profits taken as a result of the breach of duty, in order to prevent unjust enrichment.
The English law of unjust enrichment is part of the English law of obligations, along with the law of contract, tort, and trusts. The law of unjust enrichment deals with circumstances in which one person is required to make restitution of a benefit acquired at the expense of another in circumstances which are unjust.
Attorney General v Blake[2000] UKHL 45, [2001] 1 AC 268 is a leading English contract law case on damages for breach of contract. It established that in some circumstances, where ordinary remedies are inadequate, restitutionary damages may be awarded.
Dishonest assistance, or knowing assistance, is a type of third party liability under English trust law. It is usually seen as one of two liabilities established in Barnes v Addy, the other one being knowing receipt. To be liable for dishonest assistance, there must be a breach of trust or fiduciary duty by someone other than the defendant, the defendant must have helped that person in the breach, and the defendant must have a dishonest state of mind. The liability itself is well established, but the mental element of dishonesty is subject to considerable controversy which sprang from the House of Lords case Twinsectra Ltd v Yardley.
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 "constructive trust" for the harmed party, obliging the defendant to look after it. The main factors that lead to a constructive trust are unconscionable dealings with property, profits from unlawful acts, and unauthorised profits by a fiduciary. Where the owner of a property deals with it in a way that denies or impedes the rights of some other person over that property, the courts may order that owner to hold it in constructive trust. Where someone profits from unlawful acts, such as murder, fraud, or bribery, these profits may also be held in constructive trust. The most common of these is bribery, which requires that the person be in a fiduciary office. Certain offices, such as those of trustee and company director, are always fiduciary offices. Courts may recognise others where the circumstances demand it. Where someone in a fiduciary office makes profits from their duties without the authorisation of that office's beneficiaries, a constructive trust may be imposed on those profits; there is a defence where the beneficiaries have authorised such profits. The justification here is that a person in such an office must avoid conflicts of interest, and be held to account should he fail to do so.
Tracing is a procedure in English law used to identify property which has been taken from the claimant involuntarily or which the claimant wishes to recover. It is not in itself a way to recover the property, but rather to identify it so that the courts can decide what remedy to apply. The procedure is used in several situations, broadly demarcated by whether the property has been transferred because of theft, breach of trust, or mistake.
Knowing receipt is an English trusts law doctrine for imposing liability on a person who has received property that belongs to a trust, or which was held by a fiduciary, having known that the property was given to them in breach of trust. To be liable for knowing receipt, the claimant must show, first, a disposal of his trust assets in breach of fiduciary duty; second, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the claimant; and third, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.
Westdeutsche Landesbank Girozentrale v Islington LBC[1996] UKHL 12, [1996] AC 669 is a leading English trusts law case concerning the circumstances under which a resulting trust arises. It held that such a trust must be intended, or must be able to be presumed to have been intended. In the view of the majority of the House of Lords, presumed intention to reflect what is conscionable underlies all resulting and constructive trusts.
Futter v HM Revenue and Customs [2013] UKSC 26 is an English trusts law case, concerning the fiduciary duty to take into account relevant factors, and disregard irrelevant factors. It held that trustees who act on professional advice do not breach this duty, and that even if they do, the failure to have proper regard to relevant matters only ever renders a transaction voidable. For a transaction to be wholly set aside, as in common mistake, a decision by a trustee must be based on a truly "basic" mistake.
Foskett v McKeown[2000] UKHL 29 is a leading case on the English law of trusts, concerning tracing and the availability of proprietary relief following a breach of trust.
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd[2011] EWCA Civ 347 is an English trusts law case, concerning constructive trusts. Sinclair was partially overruled in July 2014 by the UK Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC.
El Ajou v Dollar Land Holdings plc[1993] EWCA Civ 4 is an English trusts law case concerning tracing and receipt of property in breach of trust.
Relfo Ltd v Varsani [2014] EWCA Civ 360 is an English unjust enrichment law case, concerning to what extent enrichment of the defendant must be at the expense of the claimant.
FHR European Ventures LLP v Cedar Capital Partners LLC[2014] UKSC 45 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 Versailles Trade Finance Ltd in favour of The Attorney General for Hong Kong v Reid (UKPC), a ruling from the Judicial Committee of the Privy Council on appeal from New Zealand.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
