Constructive Trusts
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7 Constructive Trusts I General Principles 278 G Acquisition of Property by a Criminal 302 280 II Categories of Constructive Trust H , e Vendor under a Contract A Unconscionable Conduct 280 for the Sale of Land 307 B Rescission 284 I Undertakings by a Purchaser 310 C Unauthorised Pro t by a J , e Remedial Constructive Trust 315 Fiduciary 286 D Fiduciaries de son tort 286 III e Nature of Constructive E Mutual Wills 288 Trusteeship 320 F Secret Trusts 301 i General Principles A constructive trust arises by operation of law rather than by the intention of the parties2 and it can arise in a wide variety of circumstances. But there is little agree- ment amongst the judiciary or academic writers as to when a constructive trust will be recognised and why it should be recognised. To make this area of the law even more complicated, there is no consistent use of terminology. Indeed, the term ‘constructive trust’ has been used in at least four diH erent ways. e institutional constructive trust.3 According to this view of the constructive trust, it will only be recognised where the facts of the dispute fall within an existing category of cases where a constructive trust has previously been recognised. e remedial constructive trust.4 According to this view, a constructive trust will be recognised through the exercise of judicial discretion. , is notion of the constructive t r u st ha s be en recog n i s ed i n a nu mber of C om monwe a lt h cou nt r ie s , i nclud i ng Au st r a l ia , Canada, and New Zealand, but it has generally not been recognised in England. e constructive trust as remedy.5 Where a defendant has received property in which the claimant has an equitable proprietary right, it is possible for the court to vindicate 1 H&M, pp. 301–343; Lewin, pp. 229–232; P&M, pp. 312–441; P&S, pp. 268–326; Pettit, pp. 139–150, 163–167; Snell, pp. 543–563, 587–593; T&H, pp. 768–773, 841–890; U&H, pp. 390–395, 398–408, 467–548. See generally (1913–14) 27 Harvard Law Review 125; (1955) 71 LQR 39 (A.W. Scott); Waters, e Constructive Trust (1964); Oakley, Constructive Trusts (3rd edn, 1997); Elias, Explaining Constructive Trusts (1990). 2 Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 at 1412, per Lord Millett [p. 205, above]. 3 See p. 280, below. 4 See p. 315, below. 5 See p. 944, below. © Oxford University Press General Principles that right by requiring the defendant to hold the property on constructive trust for the claimant.6 It is sometimes diY cult to see the distinction between a constructive trust being imposed as a remedy and a duty to account. Where an agent has obtained illegal pro ts, should we say that he is a constructive trustee of those pro ts, or that he is simply under a duty to account to the claimant for their value? , e former involves a proprietary claim by the claimant, the latter a personal claim. , e diH erence may be considerable, but the terminology is indiscriminate.7 So long as the defendant can pay, it makes little diH erence whether the claim is proprietary or personal. But if the defendant is insolvent, and the claimant will only be satis ed by a claim in priority over the general creditors, the distinction is crucial. By making a proprietary claim, the claimant can take any property in which it can be shown that he has an equitable proprietary interest; and he can make a claim in priority over the general creditors upon a mixed fund of money or investments. Further, if the investments have appreci- ated, the claimant may wish to claim a share of the fund at this higher value. A claim involving only the defendant’s personal liability to account has nothing to do with a constructive trust. Where, however, the claimant brings a proprietary claim against a speci c asset in the defendant’s hands, whether that is the same asset which was taken from the claimant, or a product of, or a substitute for that asset, the claimant will want the court to decide that the asset (or a share of it where the asset has become mixed with property belonging to somebody else) is held on a constructive trust for him.8 Liability as if a constructive trustee.9 Sometimes the language of the constructive trust is used even though the defendant does not hold property on trust at all. Rather, the language of the constructive trust is used simply as a device to hold the defendant personally liable to the claimant. , e language of the constructive trust in this context, although still used, is inappropriate.10 , is area of the law is considered in Chapter 20 concerning personal liability arising from a breach of trust. , e constructive trust diH ers from the other types of trust which have been considered so far. Unlike the express trust, a constructive trust arises by operation of law and does not depend on the intention of the parties.11 , e distinction between constructive and resulting trusts is less clear than it used to be. Traditionally, resulting trusts arise where there is a failure to dispose of the whole bene cial interest, while constructive trusts are imposed to prevent unconscionable conduct.12 Some of the 6 See Foskett v McKeown [2001] 1 AC 102 [p. 915, below]. Cf Lord Millett inEquity in Commercial Law (eds. Degeling and Edelman) (2005), pp. 315–316 who says that the substitute property is held on the same trusts. So if the claimant was a bene ciary under an express trust, the substituted asset would be held on the same express trust. 7 Boardman v Phipps [1967] 2 AC 46 [p. 801, below]; A-G’s Reference (No 1 of 1985) [1986] QB 491 at 503. 8 An alternative proprietary remedy is a charge on the fund held by the defendant. Such a remedy gives the claimant priority over the defendant’s other creditors but does not involve a claim to any increase in the value of the asset. See p. 945, below. 9 See p. 969, below. 10 Dubai Aluminium Co. Ltd. v Salaam [2002] UKHL 48, [2003] 2 AC 366, 404. See also Paragon Finance plc. v DB akerar and Co [1999] 1 All ER 400, 408, per Millett LJ. 11 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 705; (Lord Browne-Wilkinson); Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 at 1412, per Lord Millett. 12 See (2006) 4 LS 475 (N. Hopkins). © Oxford University Press Chapter : Constructive Trusts more recent decisions have shown a tendency to merge the two concepts, as sometimes occurred in the context of family property disputes,13 But the House of Lords has now ruled that only the constructive trust is available in that context.14 , is has little prac- tical signi cance (for example, no formalities are required for the creation of either resulting or constructive trusts)15 but adds to the existing diY culties in attempting to de ne the constructive trust. Finally, we need to consider whether a general principle can be found which will determine the circumstances in which a constructive trust will be recognised. , is would be a great improvement over the present miscellany. Some nd this in the prin- ciple of unjust enrichment, arguing that where the defendant is unjustly enriched at the expense of the claimant, he should disgorge this enrichment, and, since the defendant should never have had the property, his creditors should not be entitled to share it. Some decisions in the era of Lord Denning MR. went further, treating 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 eH ect upon the rights of third parties of using a proprietary remedy to reach the solution.16 Lord Browne-Wilkinson has sought to explain the constructive trust by reference to the unconscionable conduct of the poten- tial trustee.17 While this may explain some of the cases where a constructive trust has been recognised, it is a principle which is too uncertain to constitute a unifying theory of the constructive trust. Consequently, there appears to be no satisfactory general principle which explains when constructive trusts arise. Rather, we need to identify the particular categories where the constructive trust has previously been recognised. ii Categories of Constructive Trust A unconscionable conduct18 , e 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 charac- terised as acting unconscionably. 13 See Lord Denning MR in Hussey v Palmer [1972] 1 WLR 1286 at 1290. A resulting trust, however, creates a share proportionate to the contribution, which may not be the case with a constructive trust: p. 322, below. 14 Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432 [p. 334, below]. 15 See p. 112, above. See, however, Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 (distinctions in the conj ict of laws). 16 [1973] CLP 17 (A.J. Oakley); (1977) 28 Northern Ireland Law Quarterly 123 (R.H. Maudsley). 17 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 705, p. 281, below. See also Paragon Finance Ltd v D B akerar [1999] 1 All ER 400 at 409 (Millett LJ).