Business, Legal & Accounting Glossary
n. when a person has title to property and/or takes possession of it under circumstances in which he/she is holding it for another, even though there is no formal trust document or agreement. The court may determine that the holder of the title holds it as constructive trustee for the benefit of the intended owner. This may occur through fraud, breach of faith, ignorance or inadvertence.
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference. A constructive trust is not a trust, in the true meaning of the word, in which the trustee is to have duties of administration over a period of time, but rather it is a passive, temporary arrangement, in which the trustee’s sole duty is to transfer the title and possession to the beneficiary.
In a constructive trust, the defendant breaches a duty owed to the plaintiff. The most common such breach is a breach of fiduciary duty.
A controversial example is the case of Attorney-General for Hong Kong v Reid (1994, 1 AC 324), in which a senior prosecutor took bribes not to prosecute certain offenders. With the bribe money, he purchased property in New Zealand. His employer, the Attorney-General, sought a declaration that the property was held on constructive trust for it, on the basis of breach of fiduciary duty. The Privy Council awarded a constructive trust. The case is different from Regal (Hastings) because there was no interference with a profit-making opportunity that properly belonged to the prosecutor.
This area is highly controversial and may not represent the law in England because of the previous Court of Appeal case of Lister v Stubbs (1890, 45 Ch D 1), which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the plaintiff not enjoyed by the defendant’s other creditors. In the event of the defendant’s insolvency, the trust assets are untouchable by the general creditors. Supporters of Lister v Stubbs suggest that there is no good reason to put the victim of wrongdoing ahead of other creditors of the estate. However, Reid’s case overruled the decision in Lister v Stubbs, which is no longer good law in the UK, and some of its colonies, such as Australia.
In Foskett v McKeown a trustee used trust money together with some of his own money to purchase a life insurance policy. Then he committed suicide. The insurance company paid out to his family. The defrauded beneficiaries of the trust sought a declaration that the proceeds were held on constructive trust for them. The House of Lords said that the beneficiaries could choose between either: (a) a constructive trust over the proceeds for the proportion of the life insurance payout purchased with their money; or (b) an equitable lien over the fund for the repayment of that amount.
There is controversy as to what the true basis is of this trust. The House of Lords said that it was to vindicate the plaintiffs’ original proprietary rights. However, this reasoning has been criticized as tautologous by numerous scholars who suggest the better basis is unjust enrichment (see below). This is because there must be a reason why a new property right is created (i.e. the trust) and that must be because otherwise the family would be unjustly enriched by receiving the proceeds of the insurance policy purchased with the beneficiaries’ money. “Interference with the plaintiff’s property” can justify why the plaintiff can get it’s property back from a thief, but it cannot explain why new rights are generated in property for which the plaintiff’s original property is swapped.
In Foskett v McKeown, the plaintiff’s original property was an interest in the trust fund. The remedy they obtained was a constructive trust over an insurance payout. It is not obvious why such a new right should be awarded without saying it is to reverse the family’s unjust enrichment.
In Chase Manhattan Bank v Israel British Bank, one bank paid another bank a large sum of money by mistake (note that the recipient Bank did not do anything wrong – it just received money not owing to it). Goulding J held that the money was held on (constructive) trust for the first bank. The reasoning, in this case, has been doubted, and in Westdeutsche Landesbank Girozentrale v Islington London Borough Council the House of Lords distanced itself from the idea that unjust enrichment raises trusts in the claimant’s favour. This remains an area of intense controversy.
These type of trusts are called ‘”institutional” constructive trusts’. They arise the moment the relevant conduct (breach of duty, unjust enrichment etc) occurs. They can be contrasted with ‘”remedial” constructive trusts’, which arise on the date of judgment as a remedy awarded by the court to do justice in the particular case.
An example is the Australian case Muschinski v Dodds (1986, 160 CLR 583). A de facto couple lived in a house owned by the man. They agreed to make improvements to the property by building a pottery shed for the woman to do arts and crafts work in. The woman paid for part of this. They then broke up. The High Court held that the man held the property on constructive trust for himself and the woman in the proportions in which they had contributed to the improvements to the land. This trust did not arise the moment the woman commenced improvements – that conduct did not involve a breach of duty or an unjust enrichment etc. The trust arose at the date of judgment, to do justice in the case.
Remedial constructive trusts do not exist in England, and the High Court of Australia has also distanced itself from Muschinski v Dodds in the later case of Bathurst City Council v PWC Properties (1998, 195 CLR 566).
For example, if the defendant steals $100,000 from the plaintiff and uses that money to buy a house, the court can trace the house back to the plaintiff’s money, and can deem the house to be held in trust for the plaintiff; the defendant must then convey title to the house to the plaintiff – even if rising property values had appreciated the value of the house to $120,000 by the time the transaction occurred. If the value of the house had instead depreciated to $80,000, the plaintiff could demand a remedy at law (money damages equal to the amount stolen) instead of an equitable remedy.
The situation would be different if the defendant had mixed his own property with that of the plaintiff, for example, adding $50,000 of his own money to the $100,000 stolen from the plaintiff and buying a $150,000 house; or using plaintiff’s $100,000 to add a room to defendant’s existing house. The constructive trust would still be available, but in the proportions of the contributions, not wholly in the claimant’s favour. Alternatively, the claimant could elect for an equitable lien instead, which is like a mortgage over the asset to secure repayment.
Because a constructive trust is an equitable device, the defendant can raise all of the available equitable defenses against it – including unclean hands, laches, detrimental reliance, and undue hardship.
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This glossary post was last updated: 1st May, 2020 | 2 Views.