Constructive Trusts Notes
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Constructive Trusts Revision
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CONSTRUCTIVE TRUSTS The distinctive feature of constructive trusts is that they are imposed by the operation of law, not in response to the intentions of the settlor. The CT can arise in a range of circumstances — they appear as a residuary category of trusts which are imposed by the courts when "justice may require." WHAT IS A CONSTRUCTIVE TRUST?
There are two views of what a CT is: Constructive trusts are not trusts at all, merely remedies: This is the position taken in the US. Roscoe Pound (on US law): "The Constructive Trust … is a purely remedial institution … [there is not] the substance of the trust." Can also be seen in English cases: Hussey v Palmer: "The CT is an equitable remedy by which the court can enable an aggrieved party to obtain restitution. It is comparable to the legal remedy of money had and received." Millett: has taken this approach in a number of cases, seeing it as a 'trap' to think they are actually trusts. Swadling: argues the CT is a 'mere fiction'.
The true position is that CTs are not trusts at all, rather they are an inappropriate label for two types of court order: (i) an order for D to pay C a sum of money; (ii) an order that D convey C a particular right.
CTs do not satisfy the most basic idea of an express trust — the idea of one person holding rights for another (or for a purpose). The purpose here cannot be 'to pay C money' because otherwise all tortfeasors ordered to pay damages would be trustees. Also can't be 'to convey C property' because, although such a duty can arise under Saunders v Vautier, this is a product of the trust, not its cause.
The failure to correctly classify CTs has led to mistakes by the courts: o Led courts to think the imposition of a CT on D imposes all the obligations of a trustee, so they are reluctant to order the remedy (e.g. Westdeutsche) o Led the courts to hold property rights held on CT are not available to D's creditors, but in fact a CT merely puts D under a duty to convey the right to another, so shouldn't take priority over creditors (Chase Manhattan Bank) o The courts think the CT arises when the facts giving rise to the CT occur, when, in fact, they are just court orders which arise when the order is made o Led to a false distinction between 'institutional' and 'remedial' CTs, when in fact all CTs are 'remedial'.
We should stop talking about CTs. This would improve our understanding of the court orders to pay money / convey property rights involved in CT cases and our conception of trusts in general. The CT is a genuine trust, arising by operation of law rather than declaration of trust This is the predominant view and gains support from several features of the CT
Like express trusts, CTs arise when the facts giving rise to them occur Like an express trustee, the constructive trustee has the duties of a trustee Like express trusts, rights 'held' by the constructive trustee do not vest in the trustee in bankruptcy Like an express trustee, a constructive trustee will be liable to pay compound interest on monies received.
The only difference is that the trusts arise by 'operation of law' not because of a declaration of trust by a rights holder. INSTITUTIONAL CONSTRUCTIVE TRUSTS The categories in which CTs are imposed are distinct and it's hard to find a general theme running through them. Acquisition by fiduciaries Where D owes a fiduciary duty to C and D breaches that duty and obtains a benefit as a result, D holds that benefit on CT for C and must transfer it to C. It is clear from Keech  that if F's profits are made with property that initially belonged to the trust, then the profits / fruits of those profits will be held on a CT for P. However, there has been some disagreement over the availability of the remedy. Sinclair v Versailles : Lord Neuberger: "C cannot claim proprietary ownership of an asset purchased by F with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by C or derived from opportunities beneficially owned by the claimant." C will merely have personal claim. I.e. a CT will only be available where F has profited from trust property / opportunities owned by C. Neuberger's analysis suggests that in Boardman v Phipps  a CT was not the appropriate remedy, since B did not use the trust property, nor was the opportunity ever to be exploited by P. Wilberforce J imposed a CT in that case (although the remedy was not at issue when the case went to the HL).Boardman was, however, cited as authority by the PC in AG of HK v Reid . They found a CT could be imposed on bribes: "Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on CT for the person injured." Reid is only PC authority and not binding in English law. The position in England was that no CT arises where F has obtained a bribe / secret commission — the decision in Lister v Stubbs . Lister and not Reid was followed in Sinclair v Versailles . However, the leading case is now FHR v Cedar : involved a secret commission in the acquisition of a Monte Carlo hotel.
CA: there were two exceptions to the general rule against CTs in Sinclair: (i) where D uses C's property to make a profit; (ii) where C uses C's opportunity to make a profit. SC: the distinction suggested by the CA was unworkable and that a CT would always be available as a proprietary remedy for profits acquired from breach of fiduciary duty: "any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal." o Neuberger favoured this option as it promoted 'simplicity', however, the simpler option, which was not argued before the court, would have been no pre-judgement trust at all.
Australian approach: Grimaldi v Chameleon Mining  was to follow Reid and to make a CT available as a remedy: "To exclude the bribed fiduciary from the deterrent effect of the constructive trust [as in Lister and Sinclair] is… to make it unavailable in the very situations where deterrence is likely to be most needed" in that bribery is the most serious breach of fiduciary duty. To hold that a fiduciary who takes a bribe does not hold that bribe on constructive trust as in Lister and Sinclair is to privilege the bribed fiduciary and is "to create an incentive which should not be tolerated". However, note that in Australia the CT is a discretionary remedy — the court can exercise its discretion and withhold the remedy where the CT would unfairly prejudice D's creditors (as in Lister). Arguments for / against the expanded CT approach:
Against: i.e. C should only have a proprietary remedy when: (i) the asset is / was beneficially the property of P; or (ii) F acquired the asset by taking advantage of an opportunity or right which properly belonged to the beneficiary: o Neuberger in Sinclair:
The harsh consequences for D's creditors in insolvency, and problems of undermining the statutory insolvency scheme.
Because bribes / secret commissions could never have been received by the principal, he cannot have a proprietary interest under a CT. A CT can only be imposed where the secret profit asset was the beneficial property of P (i.e. where F makes the profit by depriving P of an asset / opportunity P should have had, or by using opportunities which were the property of the principal — e.g. Phipps). Need a proprietary link between profit and P. o P does not gain a 'windfall' proprietary interest in property he never / would never have had.
Chambers — if a CT is imposed on F's who take bribes, why is a CT only imposed in response to bribes taken in breach of fiduciary duty rather than to all bribes. On Millett's analysis, F holds the bribe or secret commission on CT in response to the wrong constituted by F's breach of fiduciary duty. This wrongs-based analysis does not explain why a trust should be imposed on F who has obtained a benefit from his position without any wrongdoing or breach of duty as in Phipps.
For: a CT should be available as a remedy for profits flowing from breach of fiduciary duty. o Neuberger in FHR: For
It protects P's right to F's undivided loyalty and enforces F's no-conflict duty. It also prevents a paradox, as this would mean that P whose agent wrongfully receives a bribe or secret commission would be worse off than P whose agent receives a benefit in a situation where the agent has done no wrong as in Phipps
True that insolvent creditors will be prejudiced in some cases, but this has little force in bribe cases because "the proceeds of a bribe or secret commission consists of property which should not be in the agent's estate at all." Further, in many cases F's receipt of the bribe will have caused loss to P, so it is justifiable that P has a proprietary interest in the bribe, despite the impact of F's creditors. Smith - the law decides whether or not a CT has arisen through analysis of the relationship between the F and the P; the existence of claims by others is irrelevant. Millett, extra-judicially
A proprietary remedy should be available as it is an appropriate equitable response to F's wrongdoing: "the evil of bribery is the betrayal of trust… the relationship between the fiduciary and his principal is one of trust and confidence." It is P's trust / confidence that puts F in the position to receive the bribe, so P should gain the benefit of it.
The no-profit and no-conflict rules are grounded in policy — they aim to be deterrents and the breach of the duties should be appropriate to this aim. In Lister F was allowed to retain the profit of his breach, whereas in Reid he was compelled to disgorge it. Reid therefore implements the deterrent policy of the rules whereas Lister does not.
Lord Neuberger's principle in Sinclair does not sufficiently recognise that equity's primary concern is to prevent F from obtaining any benefit from his breach of trust and confidence. It does not matter that this may involve giving P a windfall (in that he acquires a proprietary interest in bribe or secret commission money which does not derive from his property and could never have been acquired by him and to which he could never have been entitled); such a windfall to P is better than F retaining the profit. Hicks - Sinclair is is problematic in that it does not explain when a money/asset will be counted as property for these purposes, e.g. was the confidential information in Phipps the property of the trust? There are conflicting views on this. Smith and Millett - a CT gives better and more consistent effect to the fundamental principle that a fiduciary should not be allowed to profit from his wrong, as was the case in Lister. This is a response to the windfall argument above.
On Millett's analysis in particular, the CT is clearly being imposed as a remedy for the wrong done by the fiduciary to the principal; in these circumstances, it seems more accurate to say that the constructive trust imposed is remedial rather than institutional in that it arises or is imposed in response to wrongdoing. Recognising that this trust is in fact a remedial constructive trust imposed at the court's discretion as in Grimauldi in Australia may be advantageous in that it would allow the court to make allowances for some exceptional circumstances where the importance of protecting the fiduciary's creditors on his insolvency militate against the imposition of a constructive trust over the bribe/secret commission money. This CT is better seen as a remedial trust rather than a trust arising automatically by operation of law. Further, it fits with Swadling's idea that CTs are really just court orders to pay money or transfer property. Vendor-purchase contracts Where a purchaser enters a contract for the sale of land, the vendor will hold the land on CT for the purchaser even before legal title has passed. A CT arises even if the vendor wishes to carry out the agreement — i.e. does not depend on the vendor seeking to renege and so does not depend on unconscionability. Rather, the CT here is grounded in the equitable maxim that "equity treats
as done that which ought to be done" — contracts for the sale of land are specifically enforceable in equity, so equity treats it as having been performed immediately and the vendor holds the property on trust by the operation of law. The trust's purpose is an equitable mechanise to protect purchaser interests; accordingly, it operates in a limited way. The following cases illustrate the operation of the principle:
Lysaght v Edwards : the case involved a contract for the purchase of property — after the contract was accepted and before completion, the vendor died. Jessel MR: "The moment you have a valid contract for sale, the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser … the vendor is a constructive trustee for the purchaser of the estate from the moment the contract is entered into."
Walsh v Lonsdale : W and L agreed to a lease of a mill for 7 years — the lease was not in fact granted, but W moved in and began to pay rent. Was there a lease? Jessell MR: "He holds
… under the same terms in equity as if a lease had been granted, it being a case in which both parties admit that relief is capable of being given by specific performance." Note that the contract must be specifically enforceable for the CT to be imposed — so it will only arise in contracts for the sale of land / shares in a private company. The equitable interest passes as soon as the contract is executed. Englewood demonstrates a constructive trustee here is not subject to the full duties of a trustee: Englewood Properties Ltd v Patel :
Facts: C owned a parade of shops. Leased one to W. A term of the agreement stated that C would not allow a fixed price store to trade from the other shops. C sold the shops at auction. D purchased W's shop from C. D then discovered C's agreement with W and refused to complete
— he argued that C had breached their duties as D's constructive trustee by failing to insert a clause in the sale of the other shops (to another buyer) preventing use as a fixed price store. D was worried about being liable to W if a fixed price store operated from the other shops.
Lawrence Collins J: the vendor's fiduciary duty limited to taking reasonable care to preserve the property, and not to prejudice purchaser's interest. It did not extend to imposing covenants on purchasers of adjoining properties unless contractually obliged to do so. "The rationale of the case law is that equity imposes duties on the vendor to protect, pending completion, the interest which the purchaser has acquired under the contract." Examples of duties that could be imposed included: (i) keep property in a proper state of cultivation; (ii) ensure it does not deteriorate; (iii) not abandon rubbish on the property. Chambers
defends the Lysaght ruling that a purchaser obtains a beneficial interest as soon as the contract for sale of land is made. He argues that even though the beneficial interest in land is split between the purcahsor and vendor until purchase money is paid, the relationship between the parties exhibits the essential feature of a trust that Ts are required to use trust assets at least in part for Bs.
On VP CT trust duties: It is true that it is inappropriate to import the normal duties of an express trustee into the vendor-purchaser relationship as these duties are very onerous. But there are a wide range of different trust relationships, some far more onerous than others, so it is acceptable for the vendor-trustee to be under less onerous duties than an express trustee as in Englewood.
The only duties that should be imposed on the vendor-trustee are to perform the sale contract honestly and in good faith, and, if she wrongly sells the land to someone else, to account for the proceeds of sale to the purchaser-beneficiary. These duties are not too onerous and are consistent with what the vendor is required to do anyway under the contract of sale. Swadling criticises the Lysaght vendor-purchaser constructive trust:
The consequences of the VP CT are important on insolvency and serve to give the purchaser priority over the vendor's unsecured creditors. This cannot be justified — no reason the purchaser should have priority (particularly because the CT arises before purchase money is paid) — and produces anomalous results in the context of shares — contracts to buy shares in a private company are specifically enforceable by contracts to buy shares in a public company are not. Courts should not be allowed to use trusts to remove assets from the pool available to satisfy the insolvent vendor's debts, courts should stand neutral between creditors.
There is no reason why the availability of SP should have the effect of creating a trust. The maxim ' equity looks on that which ought to be done as done' should not produce this result, because the creation of a trust is not what the vendor has promised to do; the vendor ought to vest absolute title in the purchaser at the date of completion. Further, raising a trust is not the inevitable consequence of this maxim — in Walsh v Lonsdale, the purchaser got the equitable version of the legal right which he had contracted for.
Further the trust can't be categorised according to Birks scheme (CTs respond to: consent, wrongs, unjust enrichment, and miscellaneous events. Can't be consent because the vendor did not intend to make himself a trustee (no intention to create a trust); can't be a response to a wrong because the only potential wrong is breach of contract, but the VP CT arises before performance is due from the vendor; can't be unjust enrichment because the CT arises before purchase money is paid.
There is no adequate explanation for why the v-p constructive trust arises and it causes problems on vendor's insolvency so should be abandoned.. Turner
Defends the VP CT on the grounds that each party's performance interest under the contract of sale is better protected under the VP CT than other types of protection e.g. damages in that: (i) it offers protection against third parties, making it more difficult for them to acquire the purchased land; (ii) allows courts to issue a decree that adjusts for specific events affecting the land — e.g. delay / deterioration / rents and profits, rather than just a plain order for specific performance regardless of other circumstances affecting the land; (iii) the VP extends protection to acts not promised by the vendor — e.g. duty to maintain. But Turner's defence of the VP CT does not respond to Swadling's criticism of the way these trusts operate on insolvency of the vendor. Turner's argument in favour of the VP constructive trust places emphasis on the importance of that trust in protecting the purchaser against a third party who acquires the purchased land. But this argument is flawed in that the purchaser's equitable rights will
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