Justification for Operation of a Constructive Trust

As the quotation from Maudsley and Burns states, there is consensus that a constructive trust arises by operation of the law irrespective of the intentions of the parties.^[1] However, it is also true that a whole range of circumstances exist in which a constructive trust has been imposed which could, as the quotation also intimates, suggest a lack of agreement as to the circumstances in which a constructive trust will arise. This essay will examine the circumstances in which there is agreement in an attempt to identify a single theoretical justification for the operation of a constructive trust and explain why the formulation of an over-arching definition has proved so problematic.

It was suggested in Paragon v. Thakerer that the confusion regarding the operation of constructive trusts arose as a result of its use in two distinct circumstances.^[2] Each of these will be considered in turn in order to demonstrate the scope and operation of a constructive trust with a view to extrapolating common principles from seemingly divergent situations.

The first situation in which a constructive trust arises concerns a person who is visited with the duties of a trustee, despite not having been expressly appointed as such, as a result of a lawful transaction that precedes a breach of trust.^[3] In other words, if an individual receives property from another for the benefit of a third party but uses it in a manner that is inconsistent with the purpose for which the property was given or that is inconsistent with the rights of the third party, a constructive trust will be imposed upon him as a result of his unconscionable behaviour.^[4] This type of constructive trusts is exemplified by the cases involving breach of fiduciary duty such as Boardman v. Phipps.^[5] It is also the classification within which disputes involving the beneficial interest in domestic properties when the legal interest is in the sole name of the one of the parties has fallen.^[6] This has caused a further confusion by blurring the boundaries between constructive and resulting trusts^[7] and proprietary estoppel.^[8]

The second situation arises as a direct consequence of an unlawful transaction. This was the situation in Paragon v. Thakerer in which the property concerned was obtained by fraud and it was held that ‘such a person is not in fact a trustee at all although he may be liable to account as if he were’. A further example concerns the rule that no person may benefit from his crime; in Re Crippen, despite being the sole beneficiary of his wife’s estate, Dr Crippen could not inherit as he had murdered her.^[9] Accordingly, a constructive trust was imposed for the person next entitled under her will.

One further situation in which it is agreed that a constructive trust arises is outside of the two categories outlined in Paragon v. Thakerer and this concerns disposition of trust property in breach of trust. In other words, if an express trust exists and the trustee acts in a manner that is inconsistent with the terms of the trust, a constructive trust arises to ensure that the beneficiary is able to recover the property to which he was entitled. This has given rise to the so-called accessory principle^[10] in which a person who dishonestly receives trust property becomes a constructive trustee of it even if they did not realise that they were receiving trust property.^[11]

As these examples demonstrate, constructive trusts have been used in a wide range of circumstances. The range of circumstances in which they arise includes business transactions, criminal conduct and the diversion of the beneficial interest in the family whom seems to lend support to the suggestion that there are insurmountable barriers to the formulation of an all-embracing definition. However, although there is no common theme to the circumstances in which they have arisen, there is a common theme not so much in their operation or application but in their purpose; the rectification of unconscionable or inequitable conduct. Just as it would be unfair to allow a person who has taken possession on behalf of a third party to dispose of it for their own purposes to the detriment of the third party, it would be unfair to allow a person who has killed another to inherit under the deceased’s will or to allow a dishonest stranger to retain property to which they are not entitled.^[12] The diversity of the circumstances is not an unassailable impediment to the identification of a unifying principle as it is clear from these wide-ranging examples that a constructive trust will be imposed when an individual has behaved in an unconscionable manner, irrespective of whether this was done following an initially lawful acquisition of property or whether the dishonourable behaviour arose from the way in which they obtained the property.

This deals with the three situations detailed above in which there is agreement that a constructive trust will be imposed. The question that remains to be addressed is whether the situations which may give rise to a constructive trust but which are not universally agreed to do so can be explained on the basis of the rectification of unconscionable behaviour. For example, a secret trust^[13] in which the testator obscures the true nature of his testamentary disposition or mutual wills^[14] in which two people agree a common destination for their property irrespective of which of them dies first are situations that some view as giving rise to a constructive trust are situations in which people who are now deceased have acted in reliance with another’s promise to deal with property in a certain way hence it would be unconscionable to allow them to renege upon this agreement.^[15] The desire to prevent an unjust outcome is also evident in situations whereby a constructive trust is used to complete an incomplete transfer.^[16]

Therefore it is clear that, despite the impediment posed by the diversity of circumstances in which a constructive trust arises, there is a single unifying principle: preventing inequitable outcomes and defeating unconscionable behaviour.

Word Count: 1000 Words

Case List

Boardman v. Phipps [1966] 3 All ER 721

Burns v. Burns [1984] 1 All ER 244

Eves v. Eves [1975] 3 All ER 768

Paragon v. Thakerer [1999] 1 All ER 400

Pettitt v. Pettitt [1969] 2 All ER 966

Re Crippen [1911] P 108

Re Dale (deceased) [1993] 4 All ER 129

Re Rose [1952] 1 All ER 1217

Re Young [1950] 2 All ER 1245

Regal (Hastings) Ltd v. Gulliver [1942] 2 All ER 378

Royal Brunei Airlines v. Tan [1995] 2 AC 278

Yaxley v. Gotts [2000] 1 All ER 711

Bibliography

Gardner, S., ‘Knowing Assistance and Knowing Receipt’ Law Quarterly Review (1996) 56

Harpum, C., ‘The Stranger as Constructive Trustee’ Law Quarterly Review (1986) 114

Maudsley & Burns (2002) Trusts and Trustees: Cases and Materials, 6^th ed., London: Sweet & Maxwell, p. 240

Richardson, N., ‘Floating Trusts and Mutual Wills’ Trust Law (1996) 88

Watts, P., ‘Unjust Enrichment and Misdirected Funds’ Law Quarterly Review (1991) 521

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Footnotes

^[1] Maudsley & Burns (2002) Trusts and Trustees: Cases and Materials, 6^th ed., London: Sweet & Maxwell, p. 240

^[2] Paragon v. Thakerer [1999] 1 All ER 400

^[3] Watts, P., ‘Unjust Enrichment and Misdirected Funds’ Law Quarterly Review (1991) 521

^[4] Regal (Hastings) Ltd v. Gulliver [1942] 2 All ER 378

^[5] Boardman v. Phipps [1966] 3 All ER 721

^[6] Eves v. Eves [1975] 3 All ER 768; Burns v. Burns [1984] 1 All ER 244

^[7] Pettitt v. Pettitt [1969] 2 All ER 966

^[8] Yaxley v. Gotts [2000] 1 All ER 711

^[9] Re Crippen [1911] P 108

^[10] Harpum, C., ‘The Stranger as Constructive Trustee’ Law Quarterly Review (1986) 114

^[11] Royal Brunei Airlines v. Tan [1995] 2 AC 278

^[12] Gardner, S., ‘Knowing Assistance and Knowing Receipt’ Law Quarterly Review (1996) 56

^[13] Re Young [1950] 2 All ER 1245

^[14] Re Dale (deceased) [1993] 4 All ER 129

^[15] Richardson, N., ‘Floating Trusts and Mutual Wills’ Trust Law (1996) 88

^[16] Re Rose [1952] 1 All ER 1217