Definition

 A constructive trust is imposed, regardless of any intention, by operation of law in circumstances where it would be unconscionable for the legal owner of the property to assert beneficial ownership

“Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle” – Deane J in Muschinski v Dodds (1985) 160 CLR 583 at 614

A constructive trust comes from the word “construe”, not “construct”

•    Although no formalities are required to create a constructive trust, there must exist specific trust property

•    A constructive trust may be regarded as either a substantive institution (a type of trust imposed by analogy with express, implied or resulting trusts) or a remedial device to effect restitution of property, remove unjust enrichment, enable property to be traced, or enforce the trustee’s equitable duty

Circumstances in which a person may be held to be a constructive trustee

•    The person acquired or retained property as a result of their own breach of a fiduciary duty (e.g. Keech v Sandford, Chan v Zacharia, Boardman v Phipps)
o    If someone is held to be a constructive trustee, they may have proprietary or personal obligations (e.g. they may have a personal obligation to account for profits)

•    “Knowing receipt” of trust property as a result of breach of trust or fiduciary duty by another
o    This is where you beneficially receive assets which have been transferred in breach of trust or fiduciary duty, with knowledge or notice of the breach

•    “Knowing assistance” in a breach of trust or fiduciary duty which deprives a beneficiary
o    This is where you help a trustee or fiduciary to commit a breach of trust or fiduciary duty, with knowledge that the trustee or fiduciary is committing a breach of duty
o    The assistant is said to be a constructive trustee, but is normally only personally liable to compensate the beneficiary of the trust or fiduciary duty for losses caused by the breach

•    Breakdown of a relationship or joint venture involving the co-ownership of property (e.g. Muschinski v Dodds)
•    Surplus in the hands of a mortgagee exercising a power of sale
•    Mutual wills and ‘secret’ trusts
•    The person is the vendor under a contract for land where the purchase price has been paid
•    Property has been acquired as a result of fraud or deliberate wrongdoing

(A)    Constructive Trusts Following Breach of Fiduciary Duty
Constructive trusts imposed on fiduciaries

•    Consider the remedies in:
o    Keech v Sandford (1726)
o    Boardman v Phipps (1967)
o    Chan v Zacharia (1984)

•    Hospital Products Ltd v Unites States Surgical Corporation (1984)

“A constructive trustee may be imposed as the appropriate form of equitable relief in circumstances where a person could not in good conscience retain for himself a benefit or the proceeds of a benefit, which he has appropriated to himself in breach of his contractual or other legal or equitable obligations” – Deane J (in dissent)

Constructive trusts imposed on third parties

•    Where a breach is committed, a beneficiary may be unable to sue the fiduciary (e.g. insolvent). Instead, the beneficiary may be able to sue a third party (‘constructive trustee’) implicated in the breach of duty

The Rule in Barnes v Addy

•    Barnes v Addy (1874) LR 9 Ch App 244
Facts:    Barnes (B) and Addy (A) were brothers in law. Two sisters had inherited property from a deceased father. B was married to one sister, and A was married to
the other. They did not get along. Since A was a cousin of the family as well, he was trustee of the estate. B took exception to the fact that A was trustee for his wife’s estate. They came to a compromise where A said, “Fine, I don’t want to be trustee for your wife. You can be trustee for your wife and I’ll be trustee for my wife”. The solicitor acting for them said this was a very bad idea. The solicitor also wrote to B’s wife, advising her that it was a bad idea for her husband to act as the trustee of her estate. She returned a very icy response. Within twelve months of B becoming trustee of her estate, he took all of the money, put it into his own bank account and became bankrupt. Mrs B sued A and A’s solicitor for participating in a breach of trust. She argued that they knew this was a bad idea, but allowed the transaction to happen.

Held: Lord Selborne:    “Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as agents of trustees in transactions within their legal powers, transaction, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

•    Hence, there are two limbs to the rule in Barnes v Addy
1)    A stranger receiving trust property with knowledge
2)    A stranger knowingly assisting a trustee in a fraudulent or dishonest design

1)    “Knowing receipt”

•    This is where a constructive trust is imposed on a third party to a fiduciary relationship, who has received trust property as a result of a breach of the fiduciary’s obligations, and with knowledge of the wrongful nature of the fiduciary’s conduct
•    The recipient of trust property is held to be a constructive trustee, if the recipient has knowledge, actual or constructive, of the breach of trust or duty.
•    Elements:
1.    Actual receipt (i.e. beneficial ownership)
2.    Trust property
3.    Requisite knowledge

•    The question then becomes: What constitutes knowledge?
•    Is it the same as the doctrine of “constructive notice” in real estate law?

•    Nelson v Larholt [1948] 1 KB 339
Facts:    A “turf accountant” (bookmaker) cashed some cheques for betting arrangements. He saw that the cheques were drawn on a trust account (and this is unusual). He made some enquiries and was told that this was fine because the trust owed him some money.

Held:    The court held that he was liable as a constructive trustee. He was on notice that the person giving him these cheques was giving him money that was held on trust.

He was put to an objective standard of knowledge. An honest and reasonable person would have been put on enquiry and would not have been fobbed off by unconvincing excuses.

•    Re Montague’s Settlement Trust [1987] Ch 264
Facts:    Here, the 9th duke died and the 10th duke received property. He was told by the trustee that certain chattels were his. These chattels were released from the estate, and he gave them to his wife to sell. The 10th duke then died, and the 11th duke sued the widow of the 10th duke for knowing receipt of trust property in breach of trust. He argued that she should be held liable as a constructive trustee (to personally replenish the trust fund to compensate the beneficiary for the loss of trust property).

Held:    The tenth Duke was not a constructive trustee of chattels wrongfully released to him from the estate and which had now passed to others – it was “an honest muddle”. There is a distinction between a right to trace property, and holding someone liable as a constructive trustee – “Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights” – Sir Robert Megarry VC at 272

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