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chapter on constructive trusts

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9Constructive Trusts1 Introduction to constructive trusts(1) TerminologyThe major obstacle to any analysis of the English doctrine of constructive trusts is thewidenumberofcircumstancesthatthetermconstructivetrusthasbeenusedtodescribe.ThishasledSirPeterMillettocommentthattheuseofthelanguageofconstructive trust has become such a fertile source of confusion that it would be betterif it were abandoned.1 It has been used to describe a range of situations as diverse as theremedy available against a duciary who has made an unauthorised prot in breach ofhis duty, to the creation of a trust where parties make mutual wills. At its simplest, theterm constructive trust describes the circumstances in which property is subjected to atrustbyoperationoflaw.Unlikeanexpresslydeclaredtrust,aconstructivetrustdoesnot come into being solely in consequence of the express intention of a settlor. Unlike aresultingtrust,itisnottheproductofanimpliedintention.2InWestdeutscheLandes-bank Girozentrale v Islington London Borough Council3 Lord Browne-Wilkinson identi-ed a constructive trust as a trust which the law imposed on [the trustee] by reason ofhis unconscionable conduct.4(2) The English concept of the constructive trustAlthoughtheterminologyofconstructivetrustsisusedthroughoutcommonlawjurisdictions,itdoesnotdescribeidenticalconcepts.Dierentjurisdictionshavedeveloped widely diering views as to the nature of constructive trusts and the circum-stancesinwhichtheycomeintoexistence.Oneofthemostsignicantconceptualdistinctions is between what are described as institutional and remedial constructivetrusts.1McKendrick, Commercial Aspects of Trusts and Fiduciary Obligations (1992), p 3.2Butsee,however,MidlandBankplcvCooke[1995]4AllER562wheretheCourtofAppealfailedtomaintain a strict distinction between resulting and constructive trusts.3[1996] AC 669; (1996) 112 LQR 521 (Cape); [1996] CLJ 432 (Jones); [1997] LMCLQ 441 (Stevens)4[1996]AC669at705.SeealsoParagonFinancevDBThakerar&Co[1999]1AllER400,409whereMillett LJ stated that a constructive trust arises by operation of law whenever the circumstances are such thatit would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert hisbenecial interest in the property.(a) The institutional constructive trustAn institutional constructive trust is a trust which is brought into being on the occur-rence of specied events, without the need for the intervention of the court. The trustcomesintobeingifthefactswhicharenecessarytogiverisetoitareprovedtohaveoccurred. It exists from the time that the relevant events occurred.5 The court does notimpose the trust but rather recognises that the beneciary enjoys a pre-existing propri-etary interest in the trust property. The court has no discretion to decide whether or notthe property should be subject to a trust. Since an institutional constructive trust doesnotarisefromthejudgmentofthecourt,itiscapableofgainingpriorityoveranyinterests acquired by third parties in the trust property during the period between thecreation of the trust and its recognition by the court.(b) The remedial constructive trustIncontrasttotheinstitutionalconstructivetrust,otherjurisdictionshavecometoregardconstructivetrustsasoneofarangeofremedieswhichmayeectrestitutionwhereadefendanthasbeenunjustlyenrichedattheexpenseofaplainti.Havingfound that there has been an unjust enrichment, the court can, in its discretion, imposea constructive trust over assets representing any remaining enrichment in the hands ofthedefendantifappropriate,oralternativelyawardamonetaryremedy.Aremedialconstructivetrustisimposedbythecourt,whichdoesnotmerelyrecogniseapre-existing proprietary right. The trust arises from the date of the courts judgment and itwill not therefore gain automatic priority over the rights of third parties. These charac-teristicsofaremedialconstructivetrustwererecognisedinMetallandRohstoAGv Donaldson Lufkin & Jenerette Inc,6 where Slade LJ stated:. . . thecourtimposesaconstructivetrustdenovoonassetswhicharenotsubjecttoanypre-existing trust as a means of granting equitable relief in a case where it considers it justthat restitution should be made.7At present English law only recognises the institutional constructive trust and has notbeen willing to adopt the remedial constructive trust.8 Other jurisdictions, in particularCanada, have adopted an unjust enrichment analysis to explain the availability of con-structive trusts, and the operation of the remedial constructive trust will be examinedin detail at the end of this chapter.9(3) The search for a coherent theoryAs the terminology of constructive trusts is utilised in so many dierent contexts, it isdiculttoprovideanycoherentunifyingtheorythatwilladequatelyexplaintheir5Re Sharpe [1980] 1 All ER 198 at 203, per Browne-Wilkinson J.6[1990] 1 QB 391.7[1990] 1 QB 391 at 478. See also Re Polly Peck (No 2) [1998] 3 All ER 812 at 831, where Nourse LJ denedaremedialconstructivetrustasanorderofthecourtgranting,bywayofremedy,aproprietaryrighttosomeone who, beforehand, had no proprietary right.8See: Metall und Rohsto AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391; Westdeutsche LandesbankGirozentrale v Islington London Borough Council [1996] AC 669; Re Polly Peck (No 2) [1998] 3 All ER 812.9See below, p 000.Introduction to constructive trusts :o,incidence.Englishlawhastendedtotaketheviewthatconstructivetrustsariseinarangeofrelativelywellcircumscribedconditionsinwhichthetrusteesconductisconsidered unconscionable. A previous edition of Snells Equity concluded:For the present . . . constructive trusts fall for the most part in well-established categories,and it is only occasionally and in unusual circumstances that it would be necessary to takerefuge in such a broad and fundamental principle [ie of unconscionability].10In the case of the remedial constructive trust, the unifying fundamental principle is thatof the reversal of unjust enrichment. Although supercially attractive as a touchstone,this merely shifts the goal posts, since it becomes necessary to dene when an enrich-mentisunjust.Thiswillrequiretheidenticationofcommonfactsituationswhereenrichment is regarded as unjust, which may of themselves have no greater coherencythan those regarded as giving rise to constructive trusts in English law. In this sense therestitutionary approach may simply re-invent the wheel under a dierent name.Despite the diculty of providing any single coherent theory for the enforcement ofconstructive trusts, the factor which appears to connect the circumstances in which thecourt will nd that a constructive trust has arisen is an emphasis on the conduct of thepartywhoisrequiredtoholdpropertysubjecttotheconstructivetrust.Constructivetrustsareimposedbyequityinordertosatisfythedemandsofjusticeandgoodconscience,11andwhereitwouldbeunjusttoallowthetrusteetoassertanabsoluteentitlementtoproperty.AsLordDenningMRobservedinBinionsvEvans,12quotingthe words of an American judge:A constructive trust is the formula through which the conscience of equity nds expression.Whenpropertyhasbeenacquiredinsuchcircumstancesthattheholderofthelegaltitlemaynotingoodconscienceretainthebenecialinterest,equityconvertshimintoatrustee.13Theconceptofjusticeandgoodconscienceistoobroadtobeofdirectpracticalvalue.14 Analysis of the precise conduct justifying the imposition of a constructive trustcan only realistically be attempted in the context of the common circumstances whereconstructivetrustshavebeenfoundtoarise.ThischapterwillthereforefollowthecommonapproachofidentifyinganddescribingthecircumstancesinwhichEnglishlaw will nd that a constructive trust has been created.(4) The significance of constructive trusts(a) Creation of proprietary interestsAs a species of trust, constructive trusts inherently create equitable proprietary interestsinfavourofidentiablebeneciaries.Atrustcannotariseinabstract,butonlyin10Snell, Principles of Equity (29th edn, 1990), p 197.11Carl-Zeiss-Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276 at 301, per Edmund Davies LJ.12[1972] Ch 359 at 386.13Beatty v Guggenheim Exploration Co 225 NY 380 (1919) at 386 per Cardozo J.14See: Snells Equity (13th edn, 2000), p 221.:,o Constructive trustsrespect of dened property.15 Constructive trusts therefore provide a means by which alegal owner will be required to hold property on trust for beneciaries, despite the lackof any express or implied intention that he should do so, or where an intention to createatrustisineectivebecauseitisnotexpressedincompliancewiththeappropriatestatutory formalities.16 This ability of constructive trusts to generate proprietary inter-estshasbeenespeciallysignicantinthecontextoftheownershipofland.Alongsideresultingtrusts,constructivetrustsprovideameansbywhichapersoncanobtainashare of the benecial ownership where no formal declaration of trust has been made intheir favour.17 Where constructive trusts do give rise to proprietary interests, they mayhavefarreachingeects,especiallybydetractingfromtheintereststhatthirdpartiesmay have acquired after the trust had arisen, for example if land subject to a construct-ive trust has been mortgaged, and by gaining automatic priority over the rights of othercreditorsifthetrusteeisinsolvent.Theinstitutionalnatureoftheconstructivetrustgives the court no exibility to consider the potential eects of the constructive trust onsuch third parties or creditors.(b) Preservation of pre-existing equitable interestsConstructive trusts also operate to preserve the interest of the beneciaries of an exist-ing trust, however created, if the legal title to the trust property is wrongly transferredby the trustee. A third party who purchases the legal title to the trust property from atrustee will take free from the pre-existing trust interests of the beneciaries if he was abonadepurchaserforvaluewithoutnotice.However,iftherequirementsofthedoctrine of notice are not fullled, either because the transferee of the legal title was avolunteerwh