Defining Constructive Trusts:
Constructive trusts are constructed / made by operation of law. This means it is imposed by the law rather than because of the express provision or intention of the parties.
This does not mean that constructive trusts are necessarily unintended. It may be the case that a constructive trust may be imposed due to policy reasons, not simply to give effect to the parties’ intentions.
EG: preventing fraud.
Types of Constructive Trust and When they Arise:
Specifically Enforceable Obligations to Transfer Specific Assets:
A constructive trust over an asset will arise: [1]
if there is an obligation to transfer that very (specific and identified) asset; and
that obligation is specifically enforceable.
EG: contract to buy land.
EG: obligations to transfer shares in private (but not public) companies.
The asset will be held on trust from the point at which the obligation becomes specifically enforceable. This is because equity treats the parties as though the transfer has already occurred, even before the obligation is performed.
Informal Agreements to Hold on Trust:
An asset may be transferred to another on the understanding that the asset will be held on trust for another, without this ever being said explicitly.
EG: (secret trusts where) A transfers an asset to B, for B to hold the asset on trust for C.
Requirements for Trusts to Take Effect:
In specific circumstances, they may only take effect if formality requirements are met.
EG: dispositions of land, wills etc.
If these formality requirements are not met, the (purported) trustee will not be permitted to keep the asset for themselves. [2]
If it is an informal testamentary trust, the asset will be held on constructive trust by B for C (since A is deceased).
If it is an informal trust of land, it is unclear whether it is held on trust for C or for A.
Since they uphold intentions, some argue that these are simply express trusts. Others argue that they are constructive trusts because they prevent fraud (the trustee cannot simply say the asset is theirs, following the maxim ‘equity will not allow a statute to be used as an instrument of fraud’).
Imperfect Gifts:
Valid transfers of property require more than merely an intention to make the transfer. An imperfect gift occurs in a situation where there is an intention to make a gift, but certain requirements / legal formalities are not met.
EG: transferring shares without registering them on the company records.
Generally, this will not give rise to a trust (see Certainty). [3]
In Jones v Lock, a father made a failed attempt to make a gift of a cheque (made out to the father for £900) to his child, placing the cheque in the baby’s hand and describing it as ‘his own’. The father dies without endorsing the cheque, making it an imperfect gift.
The CA does not accept the argument that the father had declared a trust of the cheque for the benefit of his child. This is because the father intended to transfer legal title, not establish a trust.
This general bar reflects the maxim ‘equity will not perfect an imperfect gift’.
Exceptions (where a Trust will Arise):
Once the transferors’ obligations are fulfilled, a trust is created over the beneficial interest pending other legal requirements being met. This trust then ends when legal title passes.
In Re Rose, a transfer of shares is made to transfer shares from a husband (R) to his wife, and a share transfer form was sent to the company. However, the company did not make an adequate record of this, so the formality requirement wasn’t met. When R dies, the question of whether the shares form part of R’s estate (and are therefore taxable) arises.
The CA held that, since the third party (company) had not completed their part, but the transferor did everything in their power (‘every effort’), a constructive trust arose. This meant that R held the shares on trust for his wife, so they are not subject to estate tax.
Where it would be unconscionable for a donee to go back on an imperfect gift, a trust will arise. This can occur even if the ‘every effort’ requirement (Re Rose) is not met.
In Pennington v Waine, an aunt (A) intends to transfer 400 shares in a company to her nephew (H). She completes a share transfer form but it is sent to the wrong person. The form never ends up with the company, so is never registered and legal title never transfers to H. A dies and the question of who owns the shares arises.
The CA uphold a constructive trust for the nephew. This was justified on the idea of unconscionability (if the aunt had have changed her mind while she was alive, the courts would have estopped her doing this due to unconscionability – the same should apply after she is dead).
This judgement has been criticised heavily; while it gives effect to the overall intention, it leaves the law uncertain because the judgement doesn’t say when exactly unconscionability will arise. Judges may take different interpretations as to what is unconscionable.
Furthermore, the doctrine seems to have the same effect as proprietary estoppel without requiring detrimental reliance (therefore being easier to satisfy, as in the case itself).
If an imperfect gift is made and the donee does not change their mind about the transfer, the gift will be perfected, and property will be taken absolutely if the done dies and the receiving party is appointed as the executor of A’s will. [4]
Only applies where there is an intention for the property to be transferred immediately. [5]
A trust may arise in the case of ‘deathbed gifts’ (‘donationes mortis causa’) where a gift is made by a person who is contemplating that they may die shortly and hands over property (or something representing that property, such as keys) on the condition that they will only keep the property is they do indeed die. [6]
If the donee dies, the property is successfully transferred even if the usual formalities are not satisfied.
If the donee does not die, or changes their mind before they do die, the property is not transferred.
Proprietary estoppel.
Common Intention Constructive Trusts:
See Land Law – Implied Co-Ownership.
Some argue that these are express trusts because they give effect to intention. Others classify them as constructive trusts because the law is not simply giving effect to intention because it requires detrimental reliance in addition to a common intention (thus, the law is protecting against detrimental reliance, not just upholding intention). In this sense, it would be protecting against unjust enrichment.
Mistaken Payments:
Money may be paid by mistake.
In Chase Manhattan v Israel-British Bank, a payment of £2m was paid twice. The court (first instance) decided that the second payment was held on trust for the claimant (not merely a personal unjust enrichment claim).
Where a mistaken payment happens, a trust will not generally arise on receipt of a mistaken payment. A trust may arise once the recipient learns of the mistake.
In Westdeutsche v Islington LBC, money was paid under a contract between W and I. The contract was later found to be void, [7] although the parties didn’t know the contract was void until after the money was paid. W could’ve sought restitution to get the money back, but instead argued that the money was being held on resulting trust since W did not intend to make a gift. This had the advantage of a higher rate of interest available in equity and better protection against insolvency. I accepted the money should be returned, but argued it should only pay simple interest.
The HL held that there is not a trust, except in cases where the recipient knows or becomes aware of the mistake, thereby making them keeping the property unconscionable (in obiter; case about resulting trust).
Case rejects Chase Manhattan reasoning but accepts it on the facts that the bank learned of the mistake and retained the money.
The judgement is premised on the idea that it would be unfair to hold people to fiduciary duties when they are completely blameless and unaware. Once they become aware, however, these duties ought to arise.
Theft:
In cases of theft (or fraud), a constructive trust will arise. [8]
It must be noted that it seems unusual to resolve theft cases using trusts. Where property is stolen, the property rights are not transferred to the thief at all, and a thief can be sued for the tort of conversion. This makes the use of a trust unnecessary.
Reasons to use a Trust:
The standard remedy for the tort of conversion is the recovery of the monetary value of the property rather than the thing itself. [9] By using a trust, the court can require the property itself to be returned.
Furthermore, legal title may be lost if the thief mixes the property with some other property (either their own or of another party), for example by depositing stolen money into a bank account. Equitable title cannot be lost in such a way.
Criticism:
Since the thief has no title over the property, it is questionable how they can be a trustee over the stolen property. [10]
Unauthorised Profits and Breach of Fiduciary Duty:
A fiduciary duty is a duty to act in the beneficiary’s best interests. This includes a duty to not make unauthorised profits (to profit from your position as representative, without authorisation by the beneficiary / settlor).
See Trustees’ Duties.
If a trustee makes an unauthorised profit, a beneficiary can either claim –
Personal liability to the value of the profit.
Proprietary (a constructive trust) over the very assets received.
Remedy:
Traditionally, a trust arose where the asset received by the fiduciary came from the beneficiary or was diverted away from them. A trust would not arise in other cases.
Now, a trust will arise in all cases where a fiduciary makes an unauthorised profit.
In Attorney-General for Hong Kong v Reid, R is an official prosecutor in HK who makes decisions on what criminal cases to prosecute. He gets bribed by criminals so that he will not prosecute them, breaching his duty to HK. R used the bribes to buy property abroad.
The PC held that R held all the assets he received on trust for the HK government since he owed a fiduciary duty to the Crown, stripping him of his profits from his ill-deeds.
Simply stripping him of the bribes would be insufficient as the property he had purchased abroad had since appreciated in value. By asserting a property right, R lost the property too – setting a strong message that crime doesn’t pay.
Ruling has been criticised due to the effect on creditors in insolvency cases.
Insolvency EG:
D has debts of £2000. D owes £1000 to X, £500 to Y and £500 to Z. They have assets totalling £1000.
The assets would be distributed pari passu (similar to pro rata), meaning X would get £500, and Y and Z would each get £250.
If D gets £2000 in breach of fiduciary duty from C, their debt increases to £4000, and assets rise to £3000.
If C has a purely personal claim, X would get £750, Y and Z would each get £375, and C would get £1500.
If D holds the money on trust for C, C recovers their £2000 in full. X, Y and Z would have their claims met from the remaining: X would get £500, and Y and Z would each get £250 (same as if duty wasn’t there).
Remedial Constructive Trusts:
Remedial Constrictive Trust vs Institutional Constrictive Trust:
The creation of institutional constructive trusts depends on simply applying rules of law.
Examples / types (above) are institutional constructive trusts.
Remedial constructive trusts differ from this by giving judicial discretion for the courts to determine whether a trust should be imposed.
Orthodox view: Generally, English law does not recognise remedial constructive trusts (despite judicial discretion that already exists in trusts cases). There is mixed commentary of whether they should be formally introduced.
‘Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such trust having arisen (including the possibly unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not under a discretion.
A remedial constructive trust, as I understand it, is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court.’ [11]
Advantages of Discretion:
Fairness.
Would allow the courts to apply justice, not simply the law. Where the law would produce unjust results, discretion would mean judges are not compelled to reach this conclusion and, instead, come to a fairer one.
This argument is based on the idea that justice should be paramount to consistency and certainty.
Disadvantages of Discretion:
Fairness.
Like cases should be treated alike. Discretion would undermine this.
Uncertainty.
Cases would depend on the courts using their discretion. This would require cases to go through the legal system before certainty is found.
Certainty and predictability is especially important in commercial cases.
Illegitimacy.
Remedial constructive trusts would potentially give too much discretion to the courts to determine what justice is and is without a democratic mandate.
This argument disregards the fact that much of the law of property (and especially trusts) is judge-made anyway. [12]
Resources:
References:
[1] EG: Shaw v Foster (1872) LR 5 HL 321, Lysaght v Edwards (1876) LR 2 Ch D 499, Walsh v Lonsdale (1881) 21 Ch D 9 [2] Rochefoucauld v Boustead [1897] 1 Ch 196 [3] Milroy v Lord (1862) 4 De G F & J 264; Jones v Lock (1865) 1 Ch App 25 [4] Strong v Bird (1874) LR 18 Eq 315 [5] Re Freeland [1952] Ch 110 [6] See Cain v Moon [1896] 2 QB 283; Sen v Headley [1991] Ch 425 [7] Ultra vires under Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1 [8] Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL) [9] Torts (Interference with Goods) Act 1552 1977, s3 [10] Shalson v Russo [2003] EWHC 1637 (Ch), [2005] 1566 Ch 281, [110] (Rimer J) [11] Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669, 714–15 (Browne-Wilkinson LJ) [12] Webb and Akkouh, Trusts Law (5th edn, Bloomsbury Publishing 2017) 249
Cases Mentioned:
Jones v Lock (1865) 1 Ch App 25
Re Rose [1952] EWCA Civ 4
Pennington v Waine [2002] EWCA (Civ) 227, [2002] 1 WLR 2075
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL)
The Attorney General for Hong Kong v Reid (New Zealand) (UKPC) [1993] UKPC 2
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