Constructive Trusts

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Introduction

Constructive Trusts arise by operation of law

They can arise irrespective of the intention of the parties. But it is possible to bring them about by creating a situation in which they arise.

There are no well-defined circumstances in which a court will determine a constructive trust

But there are common circumstances in which constructive trusts have been found (see below)

The weak unifying factor to all circumstances in which a constructive trust arises, is usually the legal owner has conducted himself in such a way it would be unconscionable for them to maintain their property

LJ Millet: ‘A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property to assert his own beneficial interest in the property and deny the beneficial interest of another’ Paragon Finance v Thakerar [1999]

  • Thus, a person who steal property will have dealt unconscionably with it (Westdeutshe Landesbank); a person who receives a bribe in the conduct of a fiduciary office will have dealt unconscionably with the property representing that bribe (AG for HK v Reid 1994); a person who takes property by means of fraud will have dealt unconscionably with it (Westdeutshe Landesbank) – the defendant will be a constructive trustee in all these cases

Institutional v Remedial

Summary

There exists an institution/remedial dichotomy

  • Institutional constructive trusts arise at the moment the conduct occurs, on the facts
  • Remedial constructive trusts arise at the date of the court’s judgment

The institutional approach limits constructive trusts to defined sets of circumstances, so limits the judge’s discretion in deciding when and how to adjust a person’s beneficial interest

In Westdeutsche Landesbank v Islington, Lord Browne Wilkinson said an institutional constructive trust “arises by operation of law as from the date of circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past”

  • He says a remedial constructive trust “is different” as it “lies in the discretion of the court”

Most common law countries use the remedial approach (e.g. Australia), but the English courts have been more cautious/restrictive preferring the institutional approach

During the 1970s the court of appeal, led by Denning, said court need not be so formulaic, viewing constructive trusts as “imposed by law whenever justice and conscience require it” (Hussey v Palmer 1972)

Later English decisions rejected this “new model” of constructive trusts e.g. Lloyds Bank v Rosset [1991]

  • E.g. Nourse LJ in Re Polly Peck International (in administration) (No 2) [1998] said Denning was going way beyond the scope of his judicial powers

Also see the case of FHR European Ventures LLP v Cedar Capital Partners LLC [2014]

  • Lord Neuberger goes on to dismiss the remedial approach here → this case was very formulaic and applied an institutional approach

Constrictive trusts and equitable interests

Constructive trusts will give rise to equitable interests:

  • The beneficiary will have an interest in the trust property
  • Gains and losses become the property of the beneficiary
  • Priority over general creditors of the constructive trustee

Equitable remedies such as tracing and account will be available to the beneficiary

What are the duties of a constructive trustee?

Summary

There is no obligation to invest or to observe the usual duty of care for a constructive trustee → it is unreasonable to impose such obligations in cases in which they did not know that they were a trustee

The duties of constructive trustees aren’t that clear and will vary by the circumstances

Privacy and Loyalty (P. Birks, 1997):

  • There is an obligation “to convey the trust property to the beneficiary”
  • A breach of this obligation would give rise to a personal liability
  • However, they cannot have the same high standard as an express trustee

Lonrho v Fayed (No 2): “it is a mistake to suppose that in every situation in which a constructive trust arises the legal owner is necessarily subject to all the fiduciary obligations and disabilities of an express trustee” (Millet J)

How do we determine a constructive trust?

Summary

Constructive trusts arise in a wide variety of circumstances.

There is no requirement for the legal owner to have acted in any way dishonestly or discreditably - it is not dishonest to be paid money by mistake. It may be unconscionable to keep the money after the mistake has been bought to the attention of the recipient.

Common circumstances giving rise to constructive trusts:

  1. Breach of fiduciary duty
  2. Mistake
  3. Mutual wills
  4. Specifically enforceable contracts for sale (usually talk about land here)
  5. Secret trusts
  6. Conveyance by fraud
  7. The Joint Venture
  8. Property acquired through killing
  9. Liability of third party (strangers to trust)
  10. Contested interests in family homes

1) Breach of fiduciary duty

Summary

Constructive trusts are the major remedy for a breach of fiduciary duty – these constructive trusts are institutional

See the case of Keech v Sandford (1726), for example

2) Mistake

Summary

If by mistake, the claimant conveys title to the wrong person, or the wrong property is conveyed to the intended person, or the claimant is otherwise induced to act by reason of mistake, the transfer can be set aside.

See the case of Chase Manhattan v Israel-British Bank [1981]. Compare this case with Lord Browne-Wilkinson's words in Westdeutsche Landesbank v Islington [1996]

3) Mutual Wills

Summary

Constructive trusts can arise from Mutual Wills. A Mutual Will is where two or more people agree to make wills and not to revoke those wills without mutual consent i.e. they intend their wills to be mutually binding

If first to die performs, then it will be unconscionable for second to deviate from terms.

  • So, when the first person dies, the arrangement becomes binding on the surviving parties → if the survivor tries to break the mutual will arrangement his personal representative after death will hold his estate as constructive trustee subject to the mutual will

However, it is not necessary the parties be beneficiairies of the other party’s will or that they should leave property to the same person(s): they just need to agree where property should go

Following the death of the first party, the second party holds the property on a constructive - Olins v Walters

There must be an agreement between the parties not to revoke their wills i.e. intention

  • 'The conscience of the survivor’s executor’ is bound by a trust which arises out of ‘the agreement between the two testators not to revoke their wills” (Thomas and Agnes Carvel Foundation [2007])

This agreement must amount to a clear contract in law

Conduct may infer an agreement to create a Mutual Will, but usually it is cited in the Wills itself that the wills are mutually binding

See the cases of Re Oldham [1925] and Re Cleaver [1981]

Mutual Wills Remedies

If the Mutual Will is broken by the first person, their estate is liable in damages: Robinson v Ommanney

For a long time it was assumed no remedy could be obtained against the second party to die, due to the privity doctrine → however, it may now be possible for the beneficiary to enforce the contract in his own right under the Contracts Act 1999

Nevertheless, if a Mutual Will creates a trust in favour of a beneficiary they can enforce the trust against the survivor: In the Goods of Heys [1914] and s7(1) Contract Act 1999

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CONTENT

4) Land

Summary

Contract to sell land is specifically enforceable where damages is inadequate

  • Specific performance means that, in equity, the purchaser is regarded as already the owner; Thus, a vendor of land, on the conclusion of the contract of sale, becomes a trustee of the land for the purchaser (Lysaght v Edwards 1876)

The vendor, on conclusion of a sale, holds it on constructive trust for the purchaser.

  • Equity looks upon as done that which ought to have been done (Walsh v Lonsdale 1882) → The constructive trust arises from this equitable principle on basis that it would be unconscionable for one of the contracting parties to refute its specifically enforceable obligation to transfer title to other party (Neville v Wilson 1997)

The Vendor must take reasonable care of property until the transfer is completed (Englewood v Patel 2005)

  • Any changes to property between sale and completion (e.g. by fire or flooding), if without the fault of the vendor, are at purchaser’s risk (Paine v Meller 1801)

This is because we have a split of interests — legal and equitable.

  • The seller has the legal interest and the buyer has the equitable interest during interim stage

Not the same as trustee and beneficiary, since each have their own interests. But enforceable like duties of a contract

  • Cotton LJ said vendor was a trustee in a qualified sense (Rayner v Preston 1881); Lord Greene MR called him a quasi-trustee (Cumberland v Ireland)

Does not passpan to sub-purchaser.

  • If the vendor sells to another, he hold the purchase money on trust for the purchaser (Lake v Bayliss 1974)
  • If the vendor enters a contract to sell to a sub-purchaser, the sub-purchaser is also entitled to specific performance by virtue of his contract and is treated as the owner in equity (Berkley v Earl Poulett 1977)

5) Wills – secret trusts

Summary

Secret trusts take effect on the testators death and do not comply with the requirements of the Wills Act.

With a secret trust the testator normally leaves property to someone, prima facie an outright gift.

BUT, the donee in the circumstance of a fully secret trust has agreed to take on certain trusts

  • So we create this constructive trust because they (the donee) agree to hold this property for the benefit of someone else → if they therefore kept the property it would be unconscionable
  • Secret trusts therefore arise where a testator decides to leave ostensible legacies to someone whom the testator really wants to act as trustee for an intended but undisclosed beneficiary of that legacy → provided always that the obligation is a trust obligation and not merely a moral obligation: Kasperbauer v Griffith [2000]

Half Secret Trusts

A half secret trust is where property is left on trust in a will but without specifying the terms of the trust i.e. the will doesn't say where the property should go

Fully secret trusts are frequently identified as constructive trusts (Oakley 1997), whereas half-secret trusts are often considered to be a species of express trust because they are disclosed on the face of the will (Martin 1997)

Hudson argues all secret trusts ought to be considered constructive trusts effected to provide an exception to the Wills Act 1837 and thus prevent a legatee under a will from asserting an unconscionable beneficial title to property

Why do people make secret trusts?

Usually to keep the identity of the beneficiary secret, or to benefit an illegitimate child with a mistress

Where the testator is undecided about dispositions.

Secret trusts may be enforceable despite not conforming with the Wills Act.

6) Fraud

Summary

Constructive trusts are imposed where property is gained through fraud (Rouchefoucauld v Boustead 1897)

  • Under the general principles of constructive trusts, it would be unconscionable for the fraudster to retain property acquired by fraud (Westdeutshe Landesbank v Islington 1996), unless the victim acquiesced in the fraud (Lonrho v Fayed No.2 1992)

However, if there is fraudulent misrepresentation, the constructive trust will not arise unless the contract is voided: Lonrho v Al Fayed (No 2) [1991] → this is because the victim of the fraud may wish to affirm the transaction despite the fraudulent misrepresentation

  • In Re Ciro Citterio Menswear, land was acquired by 2 directors, by money was loaned to the company in breach of the Companies Act 1985. It was held the directors were not automatic constructive trustees of the money because they may approve the loan

Also see the cases of Rochefoucauld v Boustead [1897] and Bannister v Bannister [1948]

Bribes and Secret Commissions

Bribes and secret comission are essentially synonymous

Any bribe taken by a fiduciary will be held on constructive trust by that fiduciary for the beneficiaries of her fiduciary office → this principle has, however, been doubted in recent cases

In Lister v Stubbs, it was held that the claimant could not claim title to the property acquired by the bribes

Reading v Attorney General [1951] took a different view, where the court seemingly awareded a propriety remedy over the bribes

In Attorney General of Hong Kong v Reid [1994], the Privy Council overruled Lister v Stubbs and held that a proprietary constructive trust is imposed as soon as the bribe is accepted by its recipient

But then Sinclair Investments v Versailles Trade Finance Ltd [2011] came and cast doubt on the Reid principle → the court of appeal held in this case that there should be no constructive trust as to maximise assets available to unsecured creditors

  • Although the Reid principle was again later affirmed in FHR European Ventures LLP v Cedar Capital Partners LLC [2014], with Lord Neuberger backtracking on what he said in Sinclar Investments v Versailles Trade Finance Ltd [2011]

7) The Joint Venture

Summary

A constructive trust will be imposed in circumstances in which the claimant has refrained from exploiting some commercial opportunity in reliance on some agreement or pre-contractual understanding reached with the defendant i.e. ‘the equity in Pallant v Morgan’

Pallant v Morgan [1953]: the defendant and the plaintiff (i.e. claimant) owned adjacent land. Some woodland was for sale and the parties agreed that the defendant would bid for it for them both, with the exact proportions on which the land was to be held to be agreed later. The defendant succeeded but the parties were unable to agree how to divide the land. The judge did not make an order for specific performance, however, where property was obtained by one party as part of a joint enterprise, the property was held on constructive trust for both parties.

Also see the case of Banner Homes v Luff Developments [2000]

8) Unlawful killing

Summary

A person cannot benefit from their crime: a killer will become a constructive trustee of any property acquired from the killing, and will be held for the next entitled

Type of Killing

Murder → you cannot benefit if you murder someone (In the Estate of Crippen 1911)

Criminal killing

Manslaughter → the general rule is that all forms of manslaughter count (cf. statutory relief, below), although Re K (Deceased) 1986 says involuntary manslaughter is not included

Dunbar v Plant (Suicide Pact) → a suicide pact survivor may be able to get property still

Means of Acquisition i.e. how did they get the money?

There are a number of ways in which a killer can get money/property from killing someone...

Intestacy → if the murdered person has no will but under state rules the murderer would have got the property, they cannot get that property

Life insurance

Pension → killed husband and should get a widowers pension

Joint tenants (on trust 50/50) → usually 100% goes to survivor, but when you have killed someone 50% is retained by survivor and other half is held on constructive trust for the beneficiaries

Life tenant (postpone enjoyment until victim’s life expectancy) → so determine how long the person should have lived and should wait that time until you can get the property

Destination of Property

Grandchildren? → The law did say that if a person kills their parents, the grandchildren of the person killed could not get the benefit either: this was felt a bit unfair

Estates of Deceased Person Act 2011 → this says property will skip the killer and go to the next person in line (which could potentially be the grandchildren)

Statutory Relief

Forfeiture Act 1982 → forfeiture means you cannot benefit if you kill someone, but s.2 Forfeiture Act gives the court the power to modify the application of the principle in individual cases

Under s.2 Forfeiture Act 1982 the court can consider:

  • The conduct of the offender and the deceased, as well as such other circumstances as appear to be material and where the justice of case requires the rule to be modified.

Judicial commentary on “where the justice of the case requires” held to include:

  • Considering the relationship between the parties / degree of moral culpability, ‘ / nature and gravity of the offence, / intention of the deceased, / size and value of the estate, / financial position of the offender, and / moral claims and wishes of those who would be entitled to benefit on the application of the forfeiture rule

Chadwick v Collinson & Ors [2014] → judgement unequivocally shows that only in the most extreme and mitigating circumstances will the court disapply the forfeiture rule

9) Constructive trusts that arise against third parties

Summary

Third parties (“strangers” to trusts) can be made constructive trustees in three ways:

  1. By acting as a trustee without authority (trustee de son tort);
  2. Through knowing receipt of trust property; and
  3. Tough actively assisting in a breach of trust.

See the relevant topic notes on these...

Trustees de son tort

A trustee de son tort is a person who has intermeddled in the affairs of the trust without proper authority and has, in effect, become a trustee through his or her wrongdoing.

To qualify as a trustee de son tort the person must have assumed some measure of control of the trust property.

Honesty is irrelevant i.e. you don't have to be deceitful to qualify as a trustee de son tort

Dishonest assistance

This is where a trustee disposes of trust property in breach of trust and someone (the defendant) dishonestly assists in that

So the defendant here has not received trust property - if he had done, that would be knowing receipt

As the defendant has no received trust property a constructive trust is not possible and only personal remedies are available

  • However, the court have continued to use the terminology of constructive trusts and the imposition of constructive trusteeship despite the conceptual problem

Knowing Receipt

If someone receives property knowing it was conveyed in breach of trust, they be liable to return the property and they may also be personally liable to compensate for any loss caused

10) Contested interest in famly homes

Sole legal ownership

Where one of the partners is the sole legal owner of property, the other partner may have a proprietary interest in the property on 4 grounds: an express trust; a purchase money resulting trust; a Common Intention Constructive Trust; or by Proprietary Estoppel.

The Common Intention Constructive Trust

Where parties have entered into a relationship with a common intention (expressly or impliedly) that property is to be held between them in a particular way, equity may enforce that common intention by the imposition of a constructive trust as it would be unconscionable to allow the other party to deny the beneficial interest of the claimant

In the absence of evidence of express agreement, inferences of a common intention to grant a beneficial interest will arise when the party has made a direct financial contribution to the acquisition of the property

Indirect contributions, such as homemaking, will not be considered unless there was an express agreement to recognize them.

Perhaps the most difficult issue is where the legal owner has responsibility for and meets all the mortgage payments, but is only in a position to do so because the other partner is meeting other household expenses, such as utility bills, maintenance etc.

See the cases of Stack v Dowden [2007], Gissing v Gissing [1971], and Lloyds Bank v Rosset [1991]

Constructive Trusts and Proprietary Estoppel

A constructive may arise on the same facts as a proprietary estoppel → In both cases, it would be inequitable to deny the claimant's proprietary rights → there is some support for the notion that both doctrines should be merged into a single law of restitution.

  • “In the area of a joint enterprise for the acquisition of land, the two concepts [estoppel and constructive trust] coincide.” Yaxley v Gotts [2000] (Robert Walker LJ)

A constructive trust will arise at the time that the necessary conditions are met and will be retrospective; while estoppel concerns asserting an equitable claim against the “true owner.”

While a constructive trust is institutional rather than remedial, estoppel may be remedial.

Proprietary estoppel requires the elements of representation, reliance and detriment.

  • Where the legal owner has made some representation to another that they will have some beneficial interest in land; and that person, in reliance on that representation, acts to their detriment, then a proprietary estoppel may arise.
  • The legal owner is estopped from denying the other's beneficial interest.

See the case of Crabb v Arun District Council [1976]

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