Constructive trust
Encyclopedia
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. There is considerable debate as to whether a constructive trust is a real trust.
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, 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 which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the claimant 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, being a Privy Council decision Reid's case did not overrule the decision in Lister v Stubbs, which is still good law in England and Wales, but not in some of its former colonies, such as Australia. There is a tension in English law between Lister and Reid which has been highlighted in the recent cases such as Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.
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 some 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 its 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.
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. 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 Wales
, 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.
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.
Equitable remedy
Equitable remedies are judicial remedies developed and granted by courts of equity, as opposed to courts of common law. Equitable remedies were granted by the Court of Chancery in England, and remain available today in most common law jurisdictions. In many jurisdictions, legal and equitable...
resembling a trust
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
imposed by a court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...
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
Unjust enrichment
Unjust enrichment is a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing.Definition:...
or interference. There is considerable debate as to whether a constructive trust is a real trust.
Events generating constructive trusts
In a constructive trust the defendantDefendant
A defendant or defender is any party who is required to answer the complaint of a plaintiff or pursuer in a civil lawsuit before a court, or any party who has been formally charged or accused of violating a criminal statute...
breaches a duty owed to the plaintiff
Plaintiff
A plaintiff , also known as a claimant or complainant, is the term used in some jurisdictions for the party who initiates a lawsuit before a court...
. 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, in which a senior prosecutor
Prosecutor
The prosecutor is the chief legal representative of the prosecution in countries with either the common law adversarial system, or the civil law inquisitorial system...
took bribes not to prosecute certain offenders. With the bribe money, he purchased property in New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
. 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
Privy council
A privy council is a body that advises the head of state of a nation, typically, but not always, in the context of a monarchic government. The word "privy" means "private" or "secret"; thus, a privy council was originally a committee of the monarch's closest advisors to give confidential advice on...
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 which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the claimant 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, being a Privy Council decision Reid's case did not overrule the decision in Lister v Stubbs, which is still good law in England and Wales, but not in some of its former colonies, such as Australia. There is a tension in English law between Lister and Reid which has been highlighted in the recent cases such as Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.
Property interference
In Foskett v McKeown a trustee used trust money together with some of his own money to purchase a life insuranceLife insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
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
House of Lords
The House of Lords is the upper house of the Parliament of the United Kingdom. Like the House of Commons, it meets in the Palace of Westminster....
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 some 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 its 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.
Unjust enrichment
In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd 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. A de facto
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
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
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
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 Wales
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
, 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.
Usefulness of constructive trusts
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
Equitable remedy
Equitable remedies are judicial remedies developed and granted by courts of equity, as opposed to courts of common law. Equitable remedies were granted by the Court of Chancery in England, and remain available today in most common law jurisdictions. In many jurisdictions, legal and equitable...
, the defendant can raise all of the available equitable defenses against it - including unclean hands
Unclean hands
Unclean hands, sometimes called the clean hands doctrine or the dirty hands doctrine, is an equitable defense in which the defendant argues that the plaintiff is not entitled to obtain an equitable remedy on account of the fact that the plaintiff is acting unethically or has acted in bad faith with...
, laches
Laches (equity)
Laches is an "unreasonable delay pursuing a right or claim...in a way that prejudices the [opposing] party" When asserted in litigation, it is an equitable defense, or doctrine...
, detrimental reliance, and undue hardship.
See also
- RestitutionRestitutionThe law of restitution is the law of gains-based recovery. It is to be contrasted with the law of compensation, which is the law of loss-based recovery. Obligations to make restitution and obligations to pay compensation are each a type of legal response to events in the real world. When a court...
- Tracing (law)Tracing (law)Tracing is a legal process, not a remedy, by which a claimant demonstrates what has happened to his/her property, identifies its proceeds and those persons who have handled or received them, and asks the court to award a proprietary claim against the property, or an asset substituted for the...
- Account of profitsAccount of profitsAn account of profits is a type of equitable remedy most commonly used in cases of breach of fiduciary duty...
- Constructive trusts in English lawConstructive trusts in English lawConstructive trusts in English law are a form of trust created by the courts primarily where the defendant has dealt with property in an "unconscionable manner", but also in other circumstances; the property will be held in "constructive trust" for the harmed party, obliging the defendant to look...