#3111 - Constructive Trusts - GDL Equity and Trusts

Introduction

- Constructive trust: arises by operation of law, not dep. on parties’ intentions.

• imposed by equity: when justice + good conscience require person in possession of property to hold it for another.

  • cf. resulting trusts: where failure to dispose of whole beneficial interest.

  • last resort: when court feels trust should be imposed + no other form exists in circumstances.

• have been imposed in variety of situations: but list not closed.

- Substantive or remedial?

• constructive trustee’s duty : usually, only to transfer property to beneficiary appears remedy.

  • vs. substantive trusts: duty to administer property for beneficiary.

• ‘remedial’ constructive trust: widely accepted in USA, Canada, Australia, NZ.

• substantive constructive trust: view adopted by English courts.

  • substantive rights to beneficiary over property – Westdeutsche Landesbank Girozentrale v Islington LBC [1996].

• significant difference – timing of operation: esp. effect on third parties with interests in property.

  • ‘remedial’ CT: operates from time of court order.

  • substantive CT: existing proprietary interest – from date of circs. giving rise to CT.

Categories of Constructive Trusts

- Trustees’ unauthorised profits.

• trustee: duty not to profit from position CT of profits for trust fund + beneficiary.

• e.g. Keech v Sandford [1726].

- Other fiduciaries’ profits: same principle as trustee.

• fiduciary: owes another duty of utmost good faith (uberrimae fidei) must account for profits made in breach of fiduciary relationship.

• main categories of fiduciaries: (not closed class)

  • 1. trustees towards beneficiaries.

  • 2. directors towards company.

  • 3. agents towards principals.

  • 4. partners towards co-partners.

  • 5. solicitors towards clients.

- Specifically enforceable contracts: i.e. where damages inadequate remedy for breach.

• principle: equity looks on that as done which ought to be done equitable ownership passes to buyer when contract made.

• e.g. contract for sale of land: on exchange of contracts, vendor constructive trustee for purchaser until completion by conveyance – Lysaght v Edwards [1876].

  • but: vendor entitled to keep rents/profits + stay in possession until completion.

• + others: e.g. shares in private company – because not available for general purchase (Oughtred v IRC [1960]; Neville v Wilson [1996]).

- Preventing use of statute as instrument for fraud.

• secret trusts: sometimes viewed as CTs to prevent fraud (stop trustee using lack of compliance with statutory requirements to commit fraud).

- Property inherited by killer: forfeiture rule.

• public policy: no benefit from wrongdoing – unlawful killer forfeits benefit from victim’s death.

  • CT of property acquired from victim: will, intestacy, DMC, joint tenancy survivorship.

• Re Crippen [1911]: C. murdered wife then executed; C. left will in favour of mistress C. prevented from inheriting: mistress cannot take wife’s estate through C.

• but relief possible:

  • Forfeiture Act 1982 – court can modify effect of rule if justice requires, but: not murder.

    • Re K [1985]: [Vinelott J]: can apply to manslaughter – total or partial relief possible.

      • degree of moral culpability considered: e.g. full relief to wife subjected to violence for some time by husband who then killed husband.

  • Inheritance (Provision for Family and Dependents) Act 1975: killer can make claim for provision from deceased’s estate – Land v Land (Deceased) [2006].

  • July 2005 Law Comm. Report: where potential heir cannot inherit, property should be distributed as if dead inheritance would pass to killer’s heirs.

- Joint wills and mutual wills: contract to make matching wills CT on death of 1 party.

• mutual/joint will: similar provisions made in 2 people’s wills (mutual) or in 1 (joint) will.

  e.g. husband + wife each agree will: all property to other for life, remainder to children.

  • definite agreement not to revoke without other’s consent needed: Re Oldham [1925]; Re Goodchild [1997].

• contract – gov. changes made before death of either party: wills always revocable, but estate may be liable for breach of contract if revoked contrary to agreement.

• CT – if wills unrevoked until death of 1 party: executors must deal with estate according to terms of agreement, not any new will CT in favour of beneficiaries.

  • rationale: fraud on A if B changes will after A’s death.

    • Dufour v Pereira [1769]: 1^st to die ‘does by his death carry the agreement into execution’ other ‘can never unbind himself and becomes a trustee’.

• reciprocal benefit not essential: Re Dale [1994]: h. + w. made wills leaving property to 2 children in equal shares; after death of h., w. made new will leaving majority to son original terms enforced: h. had performed his part of contract, would be fraud to change.

• timing of CT: from first death.

  • Re Hagger [1930]: joint will by h. + w. left life interest to each other, remainder to 9 people; 1 of 9 survived wife but died before h. interest vested (in interest) from wife’s death.

  • Healey v Brown [2002]: h. + w. left interests in flat to each other, agreed to leave to wife’s niece on death of survivor; w. died + h. transferred flat into names of self + son as joint tenants CT despite non-compliance with s2 LP(MP)A 1989 (but only to wife’s share in flat).

- ‘Strangers’ (outsiders) become constructive trustees in certain situations:

• 1. stranger intermeddles in the trust.

• 2. stranger knowingly receives trust property transferred in breach of trust.

• 3. ‘accessory liability’ by dishonestly assisting breach of trust (although not true CT: not usually holding any trust property).

Construct Trusts As General Equitable Remedy?

- Remedial constructive trusts: popular in USA.

• USA: use of CT as general remedy – much more common.

  • s160 Restatement of Restitution: CT arises wherever holder of property would be unjustly enriched against other party if he retained property for himself.

  • flexible: terms of CT (inc. retrospective effect) tailored to circs. of case, esp. 3^rd party rights.

• [Ld Browne-Wilkinson] (in Westdeutsche): remedial CT way forward for developing proprietary restitutionary remedies.

  • but controversial: would have to be decided in future cases.

- ‘New model’ constructive trusts: [Ld Denning] attempt to widen application of CTs.

• [Denning] model: CTs wherever justice + good conscience demand it.

  • radical: CT where no necessary blame or fault on part of other party.

  • e.g. to give spouses interest in matrimonial property; e.g to give licensees proprietary interest in...