CHAPTER 10: CONSTRUCTIVE TRUSTS

Intro:
In this chapter here we are concerned with the traditional treatment of
the concept constructive trust, i.e. trusts which the law regards as
emerging because of the factual circumstances, but not because the person
who holds the property on constructive trust or the benefciary of the
constructive trust intended that to happen.
I.)Genuine Constructive Trusts:
Converting Personal Rights into Proprietary Rights Some
constructive trusts have been used by courts to convert personal
(contractual) rights, e.g. a licence, into an interest in land which will bind
the successor third parties (Errington v. Errington);
Specifcally Enforceable Contracts When there is a specifcally
enforceable contract for the sale of land or the creation of an interest in
land, then the equity will apply the maxim: Equity looks upon that as
done which ought to be done, and treat the owner as holding the
land/interest on constructive trust for the other party;
Perfecting an Imperfect Gift These are those situations where equity
perfects an imperfect gift in favour of a volunteer;
Inheriting from the Victim A person who inherits property from a
person he has killed will hold it on constructive trust;
Breach of Trust Where a third party acquires the trust assets or
traceable proceeds (who is not a bona fde purchaser for value), the
benefciary may have a proprietary claim against such a recipient who
will then be regarded as a constructive trustee of the assets he holds.
There are two situations here: frst, where the recipient holds the original
trust assets, then those assets belonged to an intentionally created
express trust for the beneft of the benefciary. In this case, the recipient
is the constructive trustee of an express trust interest, i.e. the recipients
trusteeship is constructive, but the benefciarys interest is express.
Secondly, where the recipient only holds the traceable proceeds, rather
than the original assets. In this case, since those proceeds never
belonged to the trust itself, therefore, the whole situation is that of a
constructive trust, arising wholly by operation of law;
Fiduciarys Unauthorised Proft A fduciary cannot make an
unauthorised or secret proft and must account to the principal if he
does so. In A-G for Hong Kong v. Reid, the Privy Council held that a
fduciary who received a bribe in breach of fduciary duties held that
bribe on trust for his principal.
All these situations present cases where the constructive arises by
operation of law, i.e. upon occurrence of certain facts. Contrastingly, a
remedial constructive trust is one which arises as per the discretion of the
judge rather than the application of rules (Lord Browne Wilkinson in
Westdeutsche Landesbank v. Islington). Such trust usually ofends the
rule of law. Therefore, English Law only recognises the institutional
constructive trust arising according to settled rules of law and remedial
constructive trust has been held not to be a part of English Law (Re
Goldcorp).
II.) Mistaken Examples of Constructive Trusts:
The following types of cases are mistakenly considered to be
examples of constructive trusts:
a.) Failure to Fulfil Formal Requirements:
Trusts of land which do not conform to S.53(1)(b) LPA, secret trusts
created against S.9 Wills Act and the general category of matrimonial home
cases are all enforced without they fulflling all the formal requirements
necessary in the creation of such trusts.
They are often regarded as constructive trusts, but they are in fact,
proper express trust. Such trusts are only not expressed formally, but they
are enforced as per the intentions of the parties involved.
However, certain type of matrimonial home cases do not fall within the
ambit of common intention constructive trust, rather they are enforced on
the principles of estoppel, i.e. assurance, detriment, reliance. In these cases,
due to the presence of other factors, a party may be awarded an interest
which does not match the common intention of all the parties involved.
In Midland Bank v. Cooke, the husband and wife had no common
intention that any interest in the property be given to the wife and on the
strict application of resulting trust principles, the wife was only entitled to a
share of 7%, albeit the court awarded her a 50% share on the basis of all
considering the whole scenario.
Even in the recent case of Oxley v. Hiscock (2004), Chadwick LJ
has taken a new approach in the area and has stated that in the cases of
any agreement/common intention among the parties, the court should
award any interest on the basis of the whole course of proceedings between
the parties in relation to the property.
These exceptional cases on the basis of estoppel principles are
defnitely that of a constructive trust because they court departed from any
specifc intention of the parties and, in such circumstances, the trust so
created cannot be regarded as an express trust.
b.) Constructive Trusteeship:
Third parties involved in breach of trust are often said to be
constructive trustee i.e. they are personally liable to restore the trust with
money from their own pockets as if they were a trustee. However, this is a
personal liability and not a proprietary claim as the third party holds no
specifc property for the benefciary. Thus, it is misleading to use the term
constructive trust here as there is no trust at all in the situation.
III.) Constructive Trust of the Fiduciarys !nauthorised
"rofit:
As we have seen earlier, a fduciary is liable to account to his
principal for any unauthorised profts he is liable to pay the equivalent
amount to the trust to strip him of his proft. However, it is not still clear
whether the fduciary owes a personal or a proprietary duty. The diference
being that a proprietary claim is more benefcial to a principal, especially in
circumstances where the fduciary goes, for instance, bankrupt. In
bankruptcy a proprietary claim will allow the benefciary to trace his assets
more easily and in precedence to the ordinary creditors.
Cases such as Boardman v. Phipps and IDC Ltd v. Cooley
support this proposition. But in the case of Lister & Co v. Stubbs, the
Court of Appeal opposed such situation and stated that the fduciary's
liability was a personal one, a debt in equity. The justifcation being that the
unauthorised proft did not come directly from the principal it was not to
be regarded as his in equity since it was never his. Lindley LJ stated that a
courts fnding that a fduciary held an unauthorised proft on trust for his
principal confus(es) ownership with obligation.
But more recently, the Privy Council has taken a diferent view in the
case of A-G for Hong Kong v. Reid on the basis that: Equity considers as
done that which ought to have been done. As soon as the bribe was received,
whether in cash or in kind, the false fduciary held the bribe on constructive
trust for the person injured.
This, however, seems to be a wrong justifcation as this maxim
operates when there is a specifc interest in a specifc asset, e.g. a contract
to purchase land (land being a specifc asset). It is only in these
circumstances, can the maxim be used as the equity will treat the vendor as
having transferred the title to the buyer the moment the contract is agreed
and the vendor will hold the land on constructive trust for the purchaser.
However, a debt is not a right to a specifc asset, but a right to be paid
a sum of money. You are personally liable to pay an amount, but if you have
some bank balance, then there are no specifc notes to which your right may
be attached.
Thus, this case seems to be have been decided per incuriam and has
not been followed in England in at least one case decided by the Court of
Appeal after the case of Reid: Halifax Building Society v. Thomas.
There has been no recent House of Lords decision resolving the uncertainty
in this area of law.
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