Constructive Trusts

Constructive Trusts Associate Professor Cameron Stewart

Definition • A constructive trust is a trust imposed by law. Because a constructive trust arises by operation of law, it is often said that the intention of the parties subject to a constructive trust is irrelevant to its application

Definition • However, as shall become clear below, it is wrong to state that the intention of the parties to a relationship is completely irrelevant to constructive trusts as there are forms of constructive trust that arise by way of common intention and agreement. In that sense it is preferable to say that intention is not a necessary element of the constructive trust, as it is for both express and resulting trusts.

Remedy or institution? • Property institution: This means that the express and the resulting trust reflect defined relationships between parties that come into existence at a time determined by the conduct of those parties. Once in existence, the relationships are governed by the institution of trust, meaning that rights, powers and duties of trust should be exercised and honoured between the parties.

Remedy or institution? • A remedy differs from a property institution in the time of its availability and its discretionary nature • If the constructive trust is an equitable remedy it will exist from the time that an order is made by the court: Re Polly Peck International plc (in administration) v MacIntosh [1998] 3 All ER 812 at 825

Remedy or institution? • Similarly, if constructive trusts are treated as an equitable remedy, they will be discretionary in nature. A judge could refuse to order a constructive trust if it was a remedy, whereas if the trust was an institution it would exist independently of the judge’s exercise of discretion

Remedy or institution? • Muschinski v Dodds (1985) 160 CLR 583 at 612–4 , Deane J: • At times, disputing factions have tended to polarise the discussion by reference to competing rallying points of ‘remedy’ and ‘institution’. The perceived dichotomy between those two catchwords has, however, largely been the consequence of lack of definition. In a broad sense, the constructive trust is both an institution and a remedy of the law of equity. As a remedy, it can only properly be understood in the context of the history and the persisting distinctness of the principles of equity that enlighten and control the common law.

Remedy or institution? • The use or trust of equity, like equity itself, was essentially remedial in its origins … Like express and implied trusts, the constructive trust developed as a remedial relationship superimposed upon common law rights by order of the Chancery Court. It differs from those other forms of trust, however, in that it arises regardless of intention. For that reason, it was not as well suited to development as a conveyancing device or as an instrument of property law. Indeed, whereas the rationale of the institutions of express and implied trust is now usually identified by reference to intention, the rationale of the constructive trust must still be found essentially in its remedial function which it has predominantly retained

Remedy or institution? • The effect of Deane J’s re-classification has been to allow courts to choose the time from which a constructive trust arises, and in that sense the remedial function of the trust is given effect through the imposition of the institution of trust

Remedy or institution? • The effect of Deane J’s re-classification has been to allow courts to choose the time from which a constructive trust arises, and in that sense the remedial function of the trust is given effect through the imposition of the institution of trust • . If a judge has decided to impose a constructive trust retrospectively, equity regards as done what ought to have been done and the trust is considered to have existed as an institution from that time onwards, rather than from the time of the order

Remedy or institution? • The problem with the exercise of such discretion is the uncertainty it generates for third parties who have an interest in the property in question. This is particularly the case in insolvencies where the parties are jostling for priority to access property to satisfy their debts • The institutional view of a constructive trust might be signficantly unfair to unsecured creditors who were not aware of the existence of a constructive trust, but may nevertheless find their claims cannot be satisfied because the property is held on trust

Remedy or institution? • In Parsons v McBain (2001) 109 FCR 120, when discussing the imposition of common intention constructive trusts the Full Federal Court held that the trust was created by the conduct of the parties and arose at that time, even if that had the effect of defeating unsecured creditors. • This has been followed in later cases: Jabbour v Sherwood [2003] FCA 529; Parianos v Melluish (Trustee) (2003) 30 Fam LR 524. • In Clout v Markwell [2003] QSC 91 at [21], it was said that creditors should be expected to be aware of constructive trusts which may arise when the debtor is married or in a de facto relationship.

Remedy or institution? In Australian Building and Technical Solutions Pty Ltd v Boumelhem [2009] NSWSC 460, parents had provided funds to their son to purchase land and build duplexes on it, one of which would be transferred into the parents’ names on completion. Parents had increased the mortgage on their own home to get the funds. Property used as security on debts owed by his business. Business then collapsed Parents claimed an interest under both a resulting trust (to secure their initial contribution) and a constructive trust (for later contributions they made to the building effort). These claims were resisted by the son’s creditors.

Remedy or institution? Ward J declared that there was a resulting trust for the contributions to the purchase price but did not order a constructive trust over the further amounts paid by the parents. These amounts were instead secured by equitable liens which could then be ranked against the other security interests held by the creditors.

Differences with express and resulting trusts • Millet J in Lonhro v Fayed (No 2) [1991] 4 All ER 961 at 971–2: • It is a mistake to suppose that every situation in which a constructive trust arises the legal owner is necessarily subject to all the fiduciary obligations and disabilities of an express trustee.

Differences with express and resulting trusts • The second major difference is that constructive trusts are not always subject to the requirement of certainty of subject matter • Giumelli v Giumelli (1999) 196 CLR 101 at 112 Gleeson CJ, McHugh, Gummow and Callinan JJ, found that some constructive trusts create or recognise no proprietary interest but rather impose a personal liability to account for losses sustained by constructive beneficiaries. In that situation there is no identifiable trust property

When do constructive trusts arise? • institution/remedy dichotomy • The institutional approach is that it limits constructive trusts to defined sets of circumstances and, by doing so, limits the judge’s discretion in deciding when and how to adjust a person’s beneficial entitlements.

When do constructive trusts arise? • During the 1970s the United Kingdom’s Court of Appeal, led by Lord Denning MR, adopted a free-ranging remedial basis for constructive trusts and came to the view that a constructive trust is ‘imposed by law whenever justice and good conscience require it’: Hussey v Palmer [1972] 3 All ER 744 at 747

When do constructive trusts arise? • Later English decisions rejected the new model of constructive trust: Lloyds Bank v Rosset [1991] 1 AC 107; [1990] 1 All ER 1111. It never took a foothold in Australia where it was criticised as a form of ‘palm tree justice’: Bryson v Bryant (1992) 29 NSWLR 188 at 196, per Kirby P.

When do constructive trusts arise? • Deane J - Under the law of this country — as, I venture to think, under the present law of England … proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion …, subjective views about which party ‘ought to win’ … and ‘the formless void of individual moral opinion’ … Long before Lord Seldon’s anachronism identifying the Chancellor’s foot as the measure of Chancery relief, undefined notions of ‘justice’ and what was ‘fair’ had given way in the law of equity to the rule of ordered principle which is of the essence of any coherent system of rational law. The mere fact that it would be unjust or unfair in a situation of discord for the owner of a legal estate to assert his ownership against another provides, of itself, no mandate for a judicial declaration that the ownership in whole or in part lies, in equity, in that other …

Constructive trusts to enforce agreements concerning property • Incomplete contract for the sale of property - Lysaght v Edwards - equitable conversion • 3 quals – specific performance, unconditional, identified property

Constructive trusts to enforce agreements concerning property • Incomplete gifts – Corin v Patton • Fraudulent transactions - Avondale Printers and Stationers Limited v Haggie [1979] 2 NZLR 124 ; White City Tennis Club Ltd v John Alexander’s Clubs Pty Ltd [2009] NSWCA 114 • Secret trusts

Constructive trusts to enforce agreements concerning property • Mutual wills - wills made as part of an agreement, whereby the parties promise not to revoke their wills after one of the other parties dies • The essential characteristic of mutual wills is that there be an agreement between the parties not to revoke their wills • Barns v Barns (2003) 214 CLR 169

Constructive trusts to enforce agreements concerning property • (i) it is the disposition of the property by the first party under a will in the agreed form and upon the faith of the survivor carrying out the obligation of the contract which attracts the intervention of equity in favour of the survivor; • (ii) that intervention is by the imposition of a trust of a particular character;

Constructive trusts to enforce agreements concerning property • (iii) the subject-matter is “the property passing [to the survivor] under the will of the party first dying” [Birmingham v Renfrew (1937) 57 CLR 666 at 689];

Constructive trusts to enforce agreements concerning property • (iv) that which passes to the survivor is identified after due administration by the legal personal representative [Easterbrook v Young (1977) 136 CLR 308 at 319-320] whereupon “the dispositions of the will become operative”[Attenborough v Solomon [1913] AC 76 at 83]; • (v) there is “a floating obligation” over that property which has passed to the survivor

Constructive trusts to enforce agreements concerning property • The essential characteristic of mutual wills is that there be an agreement between the parties not to revoke their wills

Constructive trusts to enforce agreements concerning property • Estoppel -Constructive trusts will often be employed as a way of enforcing the equity arising in an estoppel • Before a constructive trust is imposed to enforce an estoppel, the court should firstly decide whether there is an appropriate equitable remedy which falls short of the imposition of a trust

Constructive trusts to enforce agreements concerning property • Breach of confidence • Constructive trusts are a major remedy for breach of confidence, not only for breaches of agreements to keep information confidential, but also for situations where information has been acquired by stealth

Constructive trusts to enforce agreements concerning property • Common intention to deal with property • Where parties have entered into a relationship with a common intention that property is to be held between them in a particular way, equity may enforce that common intention by the imposition of a constructive trust.

Constructive trusts to enforce agreements concerning property • While the parties may have had a shared intention or an agreement as to how property was to be held, such an agreement may not be enforceable as a contract because the agreement is not in writing, or because the parties may not have evidenced a sufficient intention to enter into legal relations

Constructive trusts to enforce agreements concerning property • Pettit v Pettit [1970] AC 777 • Gissing v Gissing [1971] AC 886; [1970] 2 All ER 780 • A finding of expressed common intention can be made on the basis of evidence of intention prior to or at the time of purpose: Gissing v Gissing at AC 908; All ER 791. Evidence may also be admissible of intention in the immediate aftermath of purchase: Lloyd’s Bank plc v Rossett [1991] 1 AC 107 at 132

Constructive trusts to enforce agreements concerning property • In the absence of evidence of express agreement, inferences of a common intention to grant a beneficial interest will arise when the party has made a direct financial contribution to the acquisition of the property. Indirect contributions, such as homemaking, will not be considered unless there was an express agreement to recognise them

Constructive trusts to enforce agreements concerning property • Midland Bank v Cooke [1995] 4 All ER 562, where the Court of Appeal found that, once some direct financial contribution had been made (however minimal) it was then open to the court to calculate the beneficial interests on the basis of all contributions, whether direct or indirect • Oxley v Hiscock[2005] Fam 211 • Stack v Dowden [2007] 2 AC 432 • Abbott v Abbott (Antigua and Barbuda) [2007] UKPC 53 • Fowler v Barron [2008] EWCA Civ 377 • Morris v Morris [2008] EWCA Civ 257

Constructive trusts to enforce agreements concerning property • The common intention constructive trust has been recognised and accepted by Australian courts • Statements made by the parties such as ‘it’s for you and me’ or ‘this is your house’ our house’ have been taken as sufficient to prove a common intention to grant a beneficial interest

Constructive trusts to enforce agreements concerning property • Allen v Snyder (1977) 2 NSWLR 685 • De facto couple purchased a house that was financed through a loan granted by the War Homes Services Department. A condition of granting the loan was that the woman, Allen, make a declaration that she was financially dependent on the man, Snyder. An additional condition of the loan was that the title of the house should only be held by the man

Constructive trusts to enforce agreements concerning property • During the course of the relationship, Allen paid for furniture and Snyder made a will in which his interest in the house was to be passed to Allen. After the breakdown of the relationship, Allen claimed that she was entitled to an equal beneficial share on the basis that it was the parties’ common intention that she be granted such an interest.

Constructive trusts to enforce agreements concerning property • Glass JA examined the judgments in Pettitt and Gissing and accepted that a trust could arise through the common intention of parties, as long as the party asserting the interest made some contribution in reliance on the agreement. Interestingly, his Honour found that the trust was an express trust that lacked writing. The trust was enforceable because it would be fraudulent to deny the interest that was intended: at 692. Most importantly, Glass JA stressed that the intention must be actual or inferred intention. It could not be an imputed intention; that being an intention ascribed to the parties by operation of law: at 694.

Constructive trusts to enforce agreements concerning property • The factual evidence pointed out that there was a common intention that Allen be granted an interest in the house upon the occasion of the parties getting married, or on the death of Snyder. However, there was no intention to grant her an interest during the course of the de facto relationship.

Constructive trusts to enforce agreements concerning property • Ogilvie v Ryan [1976] 2 NSWLR 504, an agreement between a testator and his housekeeper to grant her a life interest in a house in his will in return for her services, was upheld on the basis that it would be fraudulent to allow the legal title holder to receive the benefit of care without granting the agreed beneficial interest • Compare to Bogdonovic v Koteff

Constructive trusts to enforce agreements concerning property • Clout v Markwell [2003] QSC 91, it was argued that the wife could not claim an interest in property (even though there had been a common intention with her husband) because her husband had not denied her interest. Instead the husband had gone bankrupt and the trustee was denying the existence of the wife’s interest. Aktinson J said that a common intention constructive trust does not require there to have been an actual denial, but rather it arises because such a denial would be unconscionable. This explanation appears to bring common intention constructive trusts more in line with the unconscionability-based construtive trust

Constructive trusts to remedy breach of fiduciary duty • Constructive trusts are the major remedy for breach of fiduciary duty • The constructive trust that arises in response to a breach of fiduciary duty is institutional, in that it arises on the occurrence of the breach, not the court order • Exceptions – loans, voidable contracts, bribes and secret commissions • Western Areas Exploration Pty Ltd v Streeter (No 3) [2009] WASC 213 • Michael Wilson and Partners Ltd v Nicholls [2009] NSWSC 1033

Constructive trusts to remedy breach of fiduciary duty • The rule in Keech v Sandford- the rule that the trustee of a tenancy who obtains a right to renew that tenancy holds that renewal on constructive trust for the beneficiaries

Constructive trusts that arise against third parties Third parties (‘strangers’ to trusts) can be made constructive trustees in three ways: • 1. by acting as a trustee without authority (trustee de son tort); • 2. through knowing receipt of trust property; and • 3. through actively assisting in a breach of trust.

Trustees de son tort • A trustee de son tort is a person who has intermeddled in the affairs of the trust without proper authority and has, in effect, become a trustee through his or her wrongdoing • To qualify as a trustee de son tort the person must have assumed some measure of control of the trust property • Honesty irrelevant

Knowing receipt In cases of knowing receipt the plaintiff must prove: • (1) the defendant has received trust moneys; • (2) the defendant knew the moneys paid were trust moneys; and • (3) the defendant knew of circumstances which made the payment a misapplication of trust moneys.

Knowing receipt • For a person to have ‘receipt’ requires him or her to have possession of the trust property for his or her ‘own use and benefit’ • Banks will not generally be treated as having received of funds placed in accounts, unless they apply the proceeds to the reduction of an overdraft, or for security: Evans v European Bank Ltd [2004] NSWCA 82.

Knowing receipt • In Baden v Societe Generale pour Favoriser le Developpment du Commerce et de L’Industrie en Franc SA [1992] 4 All ER 161 at 235, Peter Gibson J stated that there were five categories of knowledge in a recipient that were relevant to the decision to impose a constructive trust.

Knowing receipt They were: • (1) actual knowledge; • (2) wilfully shutting one’s eyes to the obvious; • (3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; • (4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; • (5) knowledge of circumstances which would put an honest and reasonable person on inquiry.

Constructive Trusts