Constructive Trusts

Introduction to constructive trusts

(1) Terminology
The major obstacle to any analysis of the English doctrine of constructive trusts is the wide number of circumstances that the term constructive trust has been used to describe. This has led Sir Peter illet to comment that the use of the language of constructive trust has become such a fertile source of confusion that it would be better if it were abandoned. ! It has been used to describe a range of situations as diverse as the remedy available against a "duciary who has made an unauthorised #ro"t in breach ofhis duty$ to the creation of a trust where #arties ma%e mutual wills. &t its sim#lest$ the term constructive trust describes the circumstances in which #ro#erty is subjected to a trust by o#eration of law. 'nli%e an e(#ressly declared trust$ a constructive trust does not come into being solely in conse)uence of the e(#ress intention of a settlor. 'nli%e a resulting trust$ it is not the #roduct of an im#lied intention. * In Westdeutsche

Landesbank Girozentrale v Islington London Borough Council 3 Lord BrowneWilkinson identied a constructive trust as a trust which the law im osed on !the trustee" b# reason o$his unconscionable conduct% .+

(2) The English concept of the constructive trust

&lthough the terminology of constructive trusts is used throughout common law jurisdictions$ it does not describe identical conce#ts. ,ierent jurisdictions have develo#ed widely diering views as to the nature of constructive trusts and the circumstances in which they come into e(istence. -ne of the most signi"cant conce#tual distinctions is between what are described as institutional and remedial constructive trusts.
! c.endric%$ Commercial &s#ects of Trusts and /iduciary -bligations 0!11*2$ # 3. idland 4an% #lc v Coo%e 5!1167 + &ll E8 69* where the Court of &##eal failed to * 4ut see$ however$

maintain a strict distinction between resulting and constructive trust 35!1197 &C 991: 0!1192 !!* ;<8 6*! 0Ca#e2: 5!1197 C;= +3* 0=ones2: 5!11>7 ; C;< ++! 0Stevens2 +5!1197 &C 991 at >?6. See also Paragon /inance v , 4 Tha%erar @ Co 5!1117 ! &ll E8 +??$ +?1 where illett ;= stated that a constructive trust arises by o#eration of law whenever the circumstances are such that it would be unconscionable for the owner of #ro#erty 0usually but not necessarily the legal estate2 to assert his bene"cial interest in the #ro#erty

(a) The institutional constructive trust

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&n institutional constructive trust is a trust which is brought into being on the occurrence of s#eci"ed events$ without the need for the intervention of the court. The trust comes into being if the facts which are necessary to give rise to it are #roved to have occurred. It e(ists from the time that the relevant events occurred.6 The court does not im#ose the trust but rather recognises that the bene"ciary enjoys a #reDe(isting #ro#rietary interest in the trust #ro#erty. The court has no discretion to decide whether or not the #ro#erty should be subject to a trust. Since an institutional constructive trust does not arise from the judgment of the court$ it is ca#able of gaining #riority over any interests ac)uired by third #arties in the trust #ro#erty during the #eriod between the creation of the trust and its recognition by the court. (b) The remedial constructive trust In contrast to the institutional constructive trust$ other jurisdictions have come to regard constructive trusts as one of a range of remedies which may eect restitution where a defendant has been unjustly enriched at the e(#ense of a #lainti. Eaving found that there has been an unjust enrichment$ the court can$ in its discretion$ im#ose a constructive trust over assets re#resenting any remaining enrichment in the hands of the defendant if a##ro#riate$ or alternatively award a monetary remedy. & remedial constructive trust is im#osed by the court$ which does not merely recognise a #reDe(isting #ro#rietary right. The trust arises from the date of the courts judgment and it will not therefore gain automatic #riority over the rights of third #arties. These characteristics of a remedial constructive trust were recognised in &etall and 'ohsto (G v )onaldson Lu$kin * +enerette Inc $9 where Slade ;= statedC, , , the

court im oses a constructive trust de novo on assets which are not sub-ect to an# re-e.isting trust as a means o$ granting e/uitable relie$ in a case where it considers it -ust that restitution should be made,% >&t #resent English law only recognises
the institutional constructive trust and has not been willing to ado#t the remedial constructive trust.B -ther jurisdictions$ in #articular Canada$ have ado#ted an unjust enrichment analysis to e(#lain the availability of constructive trusts$ and the o#eration of the remedial constructive trust will be e(aminedin detail at the end of this cha#ter.1

68e Shar#e 5!1B?7 ! &ll E8 !1B at *?3$ #er 4rowneDFil%inson =. 95!11?7 ! <4 31!. >5!11?7 ! <4 31! at +>B. See also 8e Polly Pec% 0Go *2 5!11B7 3 &ll E8 B!* at B3!$ where Gourse ;= de"ned a remedial constructive trust as an order of the court granting$ by way of remedy$ a #ro#rietary right to someone who$ beforehand$ had no #ro#rietary right. BSeeC etall und 8ohsto &H v ,onaldson ;uf%in @ =enrette Inc 5!11?7 ! <4 31!: Festdeutsche ;andesban% HiroIentrale v Islington ;ondon 4orough Council 5!1197 &C 991: 8e Polly Pec% 0Go *2 5!11B7 3 &ll E8 B!*. 1See below$ # ???.

(3) The search for a coherent theory.

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&s the terminology of constructive trusts is utilised in so many dierent conte(ts$ it is dicult to #rovide any coherent unifying theory that will ade)uately e(#lain their incidence. English law has tended to ta%e the view that constructive trusts arise in a range of relatively well circumscribed conditions in which the trustees conduct is considered unconscionable. & #revious edition of Snells E)uity concluded0 1or the resent , , , constructive trusts $all $or the most art in well-established categories2 and it is onl# occasionall# and in unusual circumstances that it would be necessar# to take re$uge in such a broad and $undamental rinci le !ie o$ unconscionabilit#",% 3 4 In the case of the remedial constructive trust$ the unifying fundamental #rinci#le is that of the reversal of unjust enrichment. &lthough su#er"cially attractive as a touchstone$ this merely shifts the goal #osts$ since it becomes necessary to de"ne when an enrichment is unjust. This will re)uire the identi"cation of common fact situations where enrichment is regarded as unjust$ which may of themselves have no greater coherency than those regarded as giving rise to constructive trusts in English law. In this sense the restitutionary a##roach may sim#ly reDinvent the wheel under a dierent name. ,es#ite the diculty of #roviding any single coherent theory for the enforcement of constructive trusts$ the factor which a##ears to connect the circumstances in which the court will "nd that a constructive trust has arisen is an em#hasis on the conduct of the #arty who is re)uired to hold #ro#erty subject to the constructive trust. Constructive trusts are im#osed by e)uity in order to satisfy the demands of justice and good conscience$!!and where it would be unjust to allow the trustee to assert an absolute entitlement to #ro#erty. &s ;ord ,enning 8 observed in Binions v 5vans $!*)uoting the words of an &merican judgeC ( constructive trust is the $ormula

through which the conscience o$ e/uit# nds e. ression, When ro ert# has been ac/uired in such circumstances that the holder o$ the legal title ma# not in good conscience retain the benecial interest2 e/uit# converts him into a trustee .!3The
conce#t of justice and good conscience is too broad to be of direct #ractical value. !+ &nalysis of the #recise conduct justifying the im#osition of a constructive trust can only realistically be attem#ted in the conte(t of the common circumstances where constructive trusts have been found to arise. This cha#ter will therefore follow the common a##roach of identifying and describing the circumstances in which English law will "nd that a constructive trust has been created.
0+2 The significance of constructive trusts 0a2 Creation of #ro#rietary interests &s a s#ecies of trust$ constructive trusts inherently create e)uitable #ro#rietary interests in favour of identi"able bene"ciaries. & trust cannot arise in abstract$ but only in !? Snell$ Princi#les of E)uity 0*1th edn$ !11?2$ # !1>. !! CarlDJeissDStiftung v Eerbert Smith @ Co 0Go *2 5!1917 * Ch *>9 at 3?!$ #er Edmund ,avies ;=. !* 5!1>*7 Ch 361 at 3B9. !3 4eatty v Huggenheim E(#loration Co **6 GK 3B? 0!1!12 at 3B9 #er CardoIo =. !+ SeeC Snells E)uity 0!3th edn$ *???2$ # **!.

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