Constructive Trust in Relation

Constructive Trust In Relation To Determination Of Property Rights In Homes

Basic Principles

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.

An equitable trust is imposed by the court on grounds of conscience, without reference to the implied or presumed intention of any person. A constructive trust is also imposed, 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 does not arise because of the expressed intent of a settlor, i.e. (one who establishes a trust). It is created by a court whenever title to property is held by a person who, in fairness, should not be permitted to retain it. It is frequently based on disloyalty or other breach of trust by an express trustee (the person appointed or required by law to execute a trust).

A constructive trust it also created where no express trust is created but property is obtained or retained by other unconscionable conduct. The court employs the constructive trust as a remedial device to compel the defendant to convey title to the property to the plaintiff. The Courts treat the defendant as if he or she had been an express trustee from the date of the unlawful holding of the property in question.

A constructive trust is not a trust, in the true meaning of the word, in which the trustee is to have duties of administration enduring for a substantial 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.

The right to a constructive trust is generally an alternative remedy. The aggrieved party can choose between a trust and other relief at law, such as recovery of money wrongfully taken, but cannot obtain both types of relief.

A constructive trust, as with an express trust, must cover a specific property. It cannot be predicated on mere possession of property or on a breach of contract where no ownership of property is involved.

The constructive trusts are described as being “implied” or possibly “inferred” by law. The fact that they are said to be “implied” by law suggests that it is the courts who impose the trust as a means of controlling the defendant’s conscience.

A constructive trust reacts to the unconscionable act of the defendant by imposing an equitable proprietary right over any relevant property which the defendant holds.

If the defendant does not have that property under his control so as to be susceptible of being held subject to such an equitable proprietary interest, then the defendant is required to account to the claimant-beneficiary for the value of the loss which the claimant has suffered.

Circumstances In Which A Constructive Trust Have Been Held To Exist

There is no general principle that can determine the circumstances in which a constructive trust will be recognized. Some decisions in the era of Lord Denning MR. treated a constructive trust as a doctrine which permits a desired result to be reached on a principle of justice and good conscience, regardless of the effect upon the rights of third parties of using a proprietary remedy to reach the solution.

Lord Browne-Wilkinson also sought to explain the constructive trust by reference to the unconscionable conduct of the potential trustee.

While in some cases, Constructive trust has been recognized by the courts; Constructive trust is a principle which is too uncertain to constitute a unifying theory.

Consequently, there appear to be no satisfactory general principle which explains when constructive trusts arise. Rather, in determining when constructive trust would arise, we need to identify the particular categories where the constructive trust has been recognized by the courts.

Categories Of Constructive Trusts

(i) Constructive trust imposed to prevent Unconscionable Conduct:

The court may conclude that the defendant holds property on constructive trust where he received it from the claimant in circumstances where the defendant can be characterized as acting unconscionably. This was recognized in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. In this case the plaintiff bank had paid money to the defendant local authority pursuant to an interest rate swap contract which was null and void. The bank sought restitution of the money. One question which was considered by Lord Browne-Wilkinson was whether the defendant held the money it had received on a constructive trust. His Lordship at p. 705 highlighted the relevant principles of Trust Law as:

(i)” Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).

(ii) Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware . . . in the case of a constructive trust, of the factors which are alleged to affect his conscience.

(iii) In order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property.

(iv) Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice. . . .”.

This is not a case where the bank had any equitable interest which pre-dated receipt by the local authority of the upfront payment. Therefore, in order to show that the local authority became a trustee, the bank must demonstrate circumstances which raised a trust for the first time either at the date on which the local authority received the money or at the date on which payment into the mixed account was made. Counsel for the bank specifically disavowed any claim based on a constructive trust. This was plainly right because the local authority had no relevant knowledge sufficient to raise a constructive trust at any time before the moneys, upon the bank account going into overdraft, became untraceable. Once there ceased to be an identifiable trust fund, the local authority could not become a trustee:

In the case of Muschinski v Dodds (1985) 160 CLR 583, the court also construed that a constructive trust arose. In this case 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. Then their relationship broke up. The High Court adjudged 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. Therefore the trust did not arise at the time the woman commenced improvements. The woman’s conduct did not involve a breach of duty or an unjust enrichment on her part. The trust arose at the date of judgment, so that justice will be done in the case.

(ii) Unauthorized profit by a fiduciary

Any profit which a fiduciary obtains in breach of a fiduciary duty can be claimed to be held on constructive trust for the principal to whom the duty is owed. A fiduciary includes an express trustee. It also includes for purposes of example, personal representatives, company directors, partners, solicitors, and agents etc. Therefore the categories of fiduciaries are not closed.

It is necessary to state that where a person who has not been properly appointed either as a trustee or an executor, or any other type of fiduciary, such as an agent, intermeddles with trust or estate matters, or does acts which are characteristic of the fiduciary office, such a person can be considered to be a constructive trustee.

Furthermore, “FIDUCIARIES DE SON TORT “will be treated by operation of equity as though they had been properly appointed to the respective office and so will be subject to fiduciary duties in the ordinary way and will hold property on constructive trust.

In the case of James v Williams [2000] Ch 1 CA, the plaintiff’s mother (‘the grandmother’) died intestate. The family home was to be held on statutory trusts for the plaintiff and her brother, and sister (Thirza). But the brother, although he knew that he was not solely entitled to it, did not take out letters of administration and took possession of the property as his own. The brother died. He left the property to Thirza. On her death the property was left to the defendant. The plaintiff claimed her one-third interest in the property. The defendant argued that the plaintiff’s claim was time-barred under the Limitation Act 1980. The court held that the deceased brother was an executor de son tort since he knew that he was not solely entitled to the house and he held the property on constructive trust. Consequently, the plaintiff’s claim was not time-barred.

(iii) Fraudulent Misrepresentation or Concealment

The courts hold in numerous cases that a transferee who uses fraud to obtain the transfer of property is a constructive trustee. Such situations might involve an affirmative assertion of the truth of a material fact or concealment of the existence of a material fact when there was a duty to speak.

The state of the defendant’s mind is a material fact and might be a basis for a constructive trust—such as when the defendant promises to use the property for certain purposes beneficial to the plaintiff but intends at the time of the transfer to retain it for him or herself. The defrauded party can also proceed on the theory of setting aside the transfer, which is substantially equivalent to obtaining a constructive trust, or the defrauded party can sue for damages.

A Constructive trust may also arise where there is a specifically enforceable contract and common law contractual damages would not be an adequate remedy.

Although contracts for the sale of personal property are seldom specifically enforceable, because of their ‘unique’ nature, contracts for the sale of land are. How this translates into the creation of a constructive trust is illustrated in Lysaght v Edwards (1876) 2 Ch D 499.

This case of Lysaght v Edwards proposes that on account of equity’s willingness to enforce such contracts specifically, on the conclusion of the sale the purchaser is considered the owner in equity, and accordingly, the vendor becomes a trustee of the land (property) for the purchaser.

(iv) Breach of Duty in Direct Dealing with Beneficiary

The trustee or other representative can be declared a constructive trustee of any property obtained through a transaction where there was a breach of the duty to make full disclosure and to act fairly. Such clearly inequitable conduct justifies the imposition of a constructive trust. If, therefore, a trustee purchases the interest of one of the beneficiaries under the trust for an inadequate price, without revealing facts that the beneficiary did not know concerning the value of the interest being sold, and later the trustee realizes a profit on the transaction, a constructive trust can be imposed to remove this gain from the trustee.

(v) Gift by Will or Intestacy Based upon Broken Promise

If a property owner is induced to make an absolute gift to the defendant by will due to reliance on an oral promise by the defendant to apply all or part of the property to the use of another designated person and, after the death of the testator, the defendant refuses to do as promised, he or she can be made a constructive trustee. The same result will hold when the property owner is induced to die intestate on the faith of an oral agreement by his or her heir or next of kin.

(vi) Constructive Trust under the Statute of Frauds

The Statute of Frauds, an old English Law that requires certain contracts to be in writing, does not apply to constructive trusts. The courts create constructive trusts, whether the evidence on which they are based is oral or written and whether the property involved is real or personal.

When the plaintiff conveys land by absolute deed (a document that transfers real property without restriction) based on an oral promise by the defendant to hold it in trust for the plaintiff or for a third person, and the defendant retains the property for his or her own benefit, refusing to execute the trust because it violates the statute of frauds.

The majority of courts refuse to make the defendant a constructive trustee for the plaintiff or for the intended beneficiary of the oral trust. The courts reason that to construct a trust in such a case would circumvent the purpose of the statute of frauds.

Other Observations

A minority of courts grant the decree for a constructive trust for the intended beneficiary of the oral trust because they view it as dishonest for the defendant to withhold the land from the intended beneficiary by employing the statute.

Thus this is one of the reasons why constructive trusts are uncertain, because the courts would imply a constructive trust in varying circumstances that differ.

The remedy of constructive trust can also be applied to Personal Property that is stolen or misappropriated and used to purchase other property in the name of the perpetrator. A constructive trust in favor of the aggrieved party can be imposed on such property, so long as it remains in the hands of the wrongdoer or any person to whom the wrongdoer transfers it who is not a bona fide purchaser. In order to facilitate the unimpeded flow of commercial transactions, bona fide purchasers are not subject to the application of a constructive trust.

Conclusion

It is often assumed that a constructive trust, like any other trust, is a mechanism by virtue of which specific property is vested in a trustee on trust for ascertained beneficiaries. This is not always so; because there are many differences between constructive trusts and other trusts.

A constructive trustee may not know that he is a trustee. Where the trust arises because a fiduciary has received a benefit in breach of a fiduciary obligation, it may be difficult to say what the trust property is. In many cases, the duty of a constructive trustee is less onerous than that of an express trustee; he is under no obligation to invest or to observe the usual duty of care. It would be unreasonable to impose such obligations in cases in which he did not know that he was a trustee.

In Privacy and Loyalty (ed. P. Birks, 1997), by Smith at Page 267 stated that “There is an obligation on the [constructive] trustee: to convey the trust property to or to the order of the beneficiary. A breach of this obligation would create a personal liability. But the trustee cannot, without fiction, be said to have assumed obligations of the utmost selflessness. The only way to reach the contrary conclusion would be to say that this is the technique of equity: to subject trustees, even unwilling ones, to the fiduciary standard, so as to generate the corresponding liabilities. That however, would be using the fiduciary relationship in a wholly instrumental way”

In view of the highlighted basic principles, the circumstances in which constructive trusts have been adjudged by the Courts to exist, the categories of constructive trusts, it is my humble submission that constructive trusts are undoubtedly controversial in relation to their use in determining property rights in homes.

References

(1) www.Lawteacher.net-Essays on Constructive Trust.

(2) www.Justis.com – an online library

(3) An introduction to Equity in Nigeria: by Gilbert Kodilinye (190 Edition) Chapter 7, Page 91-96.

(4) Online Wikipedia encyclopedia/notes on Wills, Trusts and Estates.

(5) Privacy and Loyalty (Edition P. Birks, 1997) by Smith.

(6) www.alastairhudson.com/Trusts by Professor Alastair Hudson

(7) Cheshire and Burn; Modern Law of Real Property (17th Edn.)

(8) Oxford University Lecture Notes on Constructive and Resulting Trusts Chapter 7