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The main categories of constructive trust

Brief 211815

Concept of Constructive Trust

A trust has been defined as, a situation in which property is vested in some one (a trustee), who is under legally recognised obligations, at least some of which are of a proprietary kind, to handle it in a certain way, and to the exclusion of any personal interest. Express trusts arise by the settlor’s conscious creation, whilst constructive trusts arise because some other legally significant circumstances are present.

The major obstacle to any analysis of the English doctrine of constructive trusts is the wide number of circumstances that the term constructive trusts has been used to describe. As a general principle, property subject to a constructive trust must have come in to the hands of the alleged trustee as a result of breach of a fiduciary obligation or the property must have come in to the hands of the alleged trustee as a result of unconscionable dealing. In Gissing v Gissing (1971) AC 886, the House of Lords held that, a constructive trust should be imposed whenever it is inequitable for a legal owner to deny the beneficiary an equitable interest in land. The court further held that, such inequitability would only occur in closely defined circumstances. These formulations in the opinion of the courts capture the essential elements of the constructive trust. The parties must have expressed or implied a common intention between them, that the property would be shared. In English law, two essential criteria are prerequisites of the establishment of a constructive trust. These are common intention between the parties to share ownership of the land concerned and detrimental reliance. The party claiming a beneficial interest must demonstrate that he significantly altered his position or acted to his detriment on the basis of the common intention.

The general academic opinion is that, constructive trusts exists in circumstances where, for whatever reason, it is right that the owner of some property should not enjoy it personally, but should hold it on trust for another.

The main categories of constructive trust

A trustee is not allowed to take advantage of his position as a trustee so as to enrich himself. This is the reason why a constructive trust may arise in the following circumstances:

Renewal of a lease. Where a trustee who held a lease for the benefit of a cestui que trust has made use of the influence to obtain a new lease, he will be compelled in equity to hold the new lease thus acquired as a constructive trustee for the benefit of the cestui que trust. See Keech v Sandford.

Obligation to account as a constructive trustee for profits received by virtue of his position as a trustee. This wide principle is continually being restated. Whenever a trustee, being the ostensible owner of property, acquires any benefit as the owner of that property, that trustee must surrender the benefit for the advantage of those who are beneficially interested in the property. This principle applies to persons in fiduciary relationships and custodian trustees.

Strangers to a trust. Where trustees allow trust property to come in to the hands of strangers to the trust, the trustees will, of course, be personally liable for breach of trust. However, the stranger may be liable as a constructive trustee. Trustee de son tort. This phrase describes a stranger who behaves as if he were a trustee; he will then become a trustee, and be subject to the same duties as properly appointed trustees.

There are also situations where a person knowingly receives property in breach of trust (receipt of property constructive trust) or receives trust property without notice of the trust and subsequently deals with it in a manner inconsistent with the trusts of which he has become cognisant (wrongful dealing constructive trust) or receives trust property knowing it to be such but without breach of trust and subsequently deals with it in a manner inconsistent with the trusts.

The vendor under a contract for the sale of land. See Earl of Egmont v Smith (1877) 6Ch D 469.

Institutional / Remedial constructive trust

An institutional constructive trust is a trust which is brought into being on the occurrence

of specified events, without the intervention of the courts. The trust comes into being if the facts which are necessary to give rise to it are proved to have occurred. Since an institutional constructive trust does not arise from the judgment of the court, it is capable of gaining priority over any interests acquired by third parties in the trust property during the period between the creation of the trust and its recognition by the court.

A remedial constructive trust is imposed by the court, which does not merely recognize a preexisting proprietary right. The trust arises from the date of the court’s judgment and it

will not therefore gain automatic priority over the rights of third parties. These characteristics of a remedial constructive trust were recognized in Re: Metall and Rohstoff (1990) 1 QB 391. At present English law only recognizes the institutional constructive trust and has not been willing to adopt the remedial constructive trust. The principle stated objection to the remedial constructive trust is that it can produce departures from established property rights.

As the terminology of constructive trusts is utilized in so many different contexts, it is

difficult to provide any coherent unifying theory that will adequately explain their

incidence. English law has tended to take the view that constructive trusts arise in a

range of relatively well circumscribed conditions in which the trustee’s conduct is

considered unconscionable. In the case of the remedial constructive trust, the unifying fundamental principle is that of the reversal of unjust enrichment.

Despite the difficulty of providing any single coherent theory for the enforcement of

constructive trusts, the factor which appears to connect the circumstances in which the

court will find that a constructive trust has arisen is an emphasis on the conduct of the

party who is required to hold property subject to the constructive trust. Constructive

trusts are imposed by equity 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 property.

Traditional categories of constructive trusts and new categories of constructive trust

Lord Denning MR advocated a novel approach whereby a constructive trust should be imposed in order to achieve perceived justice between the parties. He described this principle as a new model constructive trust. In essence, the new model constructive trust was a trust imposed to achieve restitution, in other words to prevent the legal owner of land being unjustly enriched by refusing to acknowledge that the beneficiary was entitled to an interest.

Despite Lord Denning’s attempt to mould the constructive trust into a wide remedy

available to do justice and prevent unjust enrichment, the new model constructive

trust has been comprehensively rejected by the English courts. The main objection has

been the absence of a coherent principle by which it can be decided whether the

imposition of a constructive trust is warranted in any particular situation, which would

lead to uncertainty and unpredictability in proprietary rights.

The main objection against the new model constructive trust was the fear that such an approach to proprietary entitlements would create uncertainty, and that decisions would depend on the personal moral feelings of the individual judge.

I believe that the traditional categories of constructive trust are fixed and that any new models of constructive trust that are developed will be rejected on grounds of uncertainty and lack of principle. It should not be forgotten that the principle concept of constructive trusts is that the courts are giving effect to an arrangement based upon the actual intentions of the parties, not a rearrangement in accordance with considerations of justice, independent of the intentions of the parties.

The concept of constructive trust: The Canadian approach.

The Canadian courts have moved furthest from the common intention constructive

trust and have introduced the concept of a remedial constructive trust to effect restitution

through the reversal of unjust enrichment. The principles were stated in Pettkus v

Becker (1980) 117 DLR (3d) 257.The court outlined the three elements which must be satisfied to justify the imposition of a constructive trust namely an enrichment, a corresponding deprivation and absence of any juristic reason for the enrichment.

A further aspect of the Canadian approach is that if the three elements are satisfied,

thus establishing an unjust enrichment, it is not inevitable that a constructive trust will

arise. The court enjoys discretion to decide whether a constructive trust should be

imposed, or whether some alternative remedy, for example a monetary entitlement,

would be more appropriate.

In conclusion, it is unfair to compare the Canadian approach with merely the common

intention constructive trust, since the Canadian restitutionary approach covers much

the same ground as the combined English doctrines of the common intention constructive

trust and proprietary estoppel. When these two doctrines are considered together, there may be very little practical difference between the two jurisdictions.

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