constructive trusts associate professor cameron stewart

Constructive Trusts

Associate Professor Cameron Stewart

Definition

• A constructive trust is a trust imposed by law. Because a construc tive 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.


• 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


• 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


• 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 persist ing 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 instru ment 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


• 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.

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.


• 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 con science require it’: Hussey v Palmer [1972] 3 All ER 744 at 747


• 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.


• 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 decla ration 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


concerning property • Incomplete gifts – Corrin v Patton

• Secret trusts


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


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;


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];


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


concerning property • The essential characteristic of mutual wills

is that there be an agreement between the parties not to revoke their wills


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


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


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.


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 con tract because the agreement is not in writing, or because the parties may not have evidenced a sufficient intention to enter into legal relations


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


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 inten tion in the immediate aftermath of purchase: Lloyd’s Bank plc v Rossett [1991] 1 AC 107 at 132


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. Indi rect contributions, such as homemaking, will not be considered unless there was an express agreement to recognise them


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 con tributions, whether direct or indirect


concerning property • The common intention constructive trust

has been recognised and accepted by Australian courts

• Statements made by the par ties 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


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


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.


concerning property • Glass JA examined the judgments in Pettitt and

Gissing and accepted that a trust could arise through the common inten tion 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.


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.


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


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 fiduci ary 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

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 trus tee 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.

Knowing receiptThe first three categories are often collectively

described as ‘actual knowl edge’ while the last two are jointly referred to as ‘constructive knowledge’

The courts appear to be split between acceptance of all five categories or with limiting liability to those cases of actual knowledge. It has been argued that, in cases of receipt, the recipient gets the full advantage of the breach of trust and, as a result, the liability should be strict

Knowing receiptThe more recent English approach is to treat

the Baden categories of knowledge as flexible aids to categorisation, rather than as concrete tests

This relaxation in the use of Baden categories reached its zenith in BCCI (Overseas) Ltd v Akindele [2001] Ch 437

Knowing receiptIn Australia, it appears that knowing receipt

will be established in cases 1 to 4 of the Baden categories, but confusion exists as to whether the category 5, negligent failure to inquire, should be included

Knowing receiptKnowing receipt principles have caused difficulties for the courts when applied to interests in land under the Torrens system. In the Torrens system registered interests can be set aside if they have been procured by fraud, where fraud refers to actual fraud, per sonal dishonesty or moral turpitude

Knowing receiptIn Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133, a majority of the Victorian Court of Appeal decided that a registered mortgage under the Torrens system could not be set aside in a situation where the mortgagee acted honestly but with constructive knowledge that the mortgage document was a forgery, in breach of trust

Knowing receiptBut what if the registered proprietor has actual knowledge that their interest came via breach of trust? On this issue the authorities are split. In Tara Shire Council v Garner [2003] 1 Qd R 556, a majority of the Queensland Court of Appeal accepted that knowing receipt would apply in circumstances where a registered properietor had actual knowledge that the property was trust property and that the registered transaction was a breach of trust.

Knowing receiptA similar approach was taken in Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16 at 105, although that case is distinguishable because it involved actual dishonesty on the part of the registered proprietor, in addition to knowing receipt

Knowing receiptIn contrast, the Full Court of Western Australia rejected this use of knowing receipt principles in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517. Anderson, Steyler and Pullin JJ all found that, absent ‘Torrens-style’ fraud, knowledge of a breach of trust would not defeat a registered interest, and knowing receipt principles could not be applied to set aside a registered interest.

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239

4748 The resulting law, as I apprehend it, is that for a third party to be held liable for knowing receipt:

• (a) there must be a 'trust';• (b) the trustee must have misapplied 'trust property';• (c) the third party must have received trust property;• (d) at the time of receiving the trust property, the third party must have

known of the trust and of the misapplication of the trust property; and • (e) the third party will be taken to have 'known' in the relevant sense if the

third party:• (i) has actual knowledge of the trust and the misapplication of trust property;

or• (ii) has deliberately shut his or her eyes to those things; or• (iii) has abstained in a calculated way from making such enquiries as an

honest and reasonable person would make, about the trust and the application of the trust property; or

• (iv) knows of facts which to an honest and reasonable person would indicate the existence of the trusts and the fact of misapplication.

Knowingly assisting a breach of trust

• There are three elements to the claim of knowingly assisting a breach of trust. They are, first, the defendant must know that a dishonest and fraudulent design is being implemented. Second, the defendant must know that his or her acts have the effect of assisting the design. Third, the knowl edge of the assistant (or accessory) must be of actual facts and not knowledge of mere claims or allegations


• The requisite type of knowledge in cases of ‘knowing assistance’, therefore involves complicity in the fraud, and dishonesty involved in the original breach of trust

• the Baden categories have been discarded in the United Kingdom for cases of knowing assistance and replaced with a more general test of ‘dishonesty’. In Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378 at 390–1; [1995] 3 All ER 97 at 107, Lord Nicholls stated that the test of dishonesty was an objective test of whether the person acted as ‘an honest person would in the circumstances’ in light of what the person actu ally knew at the time, rather than what a reasonable person would have known


• The test of dishonesty was further clarified in Twinsectra Ltd v Yardley [2002] 2 AC 164; [2002] 2 All ER 377, where a combined test was proposed, encompassing objective and subjective elements. The test (as proposed by Lord Hutton) required a finding that the defendant’s conduct was dishonest by ordinary standards of reasonable and honest people, and that the defendant realised that by those standards he or she had acted dishonestly. Lord Millet, was critical of this test in his dissent, as he believed that this test should not have to take account of whether the defendant actually knew he or she was acting dishonestly

Barlow Clowes International Ltd (In Liq) v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 All ER 333.


• In NCR Australia v Credit Connection [2004] NSWSC 1, Austin J summarised the position at [168-9] as follows:What seems to emerge from these observations is that liability arises where the defendant has assisted in the trustee's dishonest and fraudulent design and:

• has actual knowledge of the dishonest and fraudulent design; or

• has deliberately shut his or her eyes to such a design; or


• has abstained in a calculated way from making such inquiries as an honest and reasonable person would make, where such inquiries would have led to discovery of the dishonest and fraudulent design; or

• has actual knowledge of facts which to a reasonable person would suggest a dishonest and fraudulent design.

• Other Australian cases have indicated support for the test of dishonesty set out in Royal Brunei Airlines and Twinsectra: Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133; Voss v Davidson [2002] QSC 316; Maher v Millennium Markets Pty Ltd [2004] VSC 174.

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22

• High Court indicated that while Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy, the five categories found in Baden assist in an analysis of those principles

• the High Court noted, at [113], that recent authorities assumed (although it had rarely if at all been decided) that the first limb of Barnes v Addy applied not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary principles.

Constructive trusts and stolen property

• It has been said that a thief holds stolen property on constructive trust for the true owner, even in the absence of a prior fiduciary relationship: Black v S Freedman & Co (1910) 12 CLR 105. If the thief then makes a gift of the property to a third party that third party will also be held liable to the trust. However if the third party provides consideration, the constructive trust will only become effective when the third pary acquires knowledge of the theft


• In Evans v European Bank Ltd [2004] NSWCA 82, Spigelman CJ thought that such a trust was better described as resulting trust because of its automatic nature and institutional characteristics. A similar approach was adopted in Port of Brisbane Corp v ANZ Securities Ltd [2003] 2 Qd R 661, a case involving the theft by an employee of several million dollars from a company, which was then invested in a trust account with the defendant bank. By the time the theft had been discovered the trust monies had been dispersed from the trust account


• The plaintiff company argued (amongst other things) that the defendant bank had held the monies on resulting trust for it and that the dispersement of those funds was a breach of that trust. In dismissing this claim, the Court of Appeal accepted the resulting trust analysis. It was said that these resulting trusts exist immediately on the transfer of trust property but that third parties are not subject to them until they become aware of their positions. It was also said that this resulting trust was not a fiduciary relationship. Finally, it was said that the resulting trust could not exist if the trust property had disappeared by the time of the judgment.


• It is hard to see how the classification of these trusts as resulting trusts can be correct. According to the presumptions of resulting trust, all the thief need do to destroy the trust is prove that there was no trust intended by the victim (which will always be the case). Given these trusts are imposed regardless of the intentions of the parties they are better classed as constructive trusts, albeit of an institutional kind.

Constructive trusts to remedy unconscionable conduct

• In Canada, the principle of unjust enrichment has been adopted as the fundamental principle justifying the remedial constructive trust: Rathwell v Rathwell (1978) 83 DLR (3d) 289. In Pettkus v Becker (1980) 117 DLR (3d) 257, the Supreme Court of Canada accepted that, in the absence of some common intention between the parties, a constructive trust should be imposed to remedy unjust enrichment in a domestic property dispute. Unfor tunately, the decision in Pettkus v Becker gave rise to the belief that constructive trusts could only be imposed when there was unjust enrichment


• In Australia, unjust enrichment has not yet been accepted as a ground for the imposition of a constructive trust: Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536; Rush v Keogh [2000] NSWSC 624. The governing principle is that equity will impose a constructive trust to prevent the unconscionable retention of benefit


• Muschinski v Dodds (1985) 160 CLR 583 • Baumgartner v Baumgartner (1987) 164

CLR 137


• Turner v Dunne [1996] QCA 272 at 4–5 as:• 1. A constructive trust may be imposed even though the

person held to be trustee had no intention to create a trust or hold property on trust.

• 2. An intention to create a trust may be imputed where it is necessary to do so ‘in good faith and in conscience’.

• 3. A principle which may be applied is that which restores to a party contri butions made to a joint endeavour which fails, when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them.

• 4. Contributions, financial and otherwise, to the purposes of the jointed rela tionship are relevant for this purpose.

The effect of legislation on constructive trusts in the family

context • Section 79 of the Family Law Act 1975

(Cth)

• Property (Relationships) Act 1982 (NSW)

• In New South Wales the definition of de facto relationships includes all rela tionships between two adult persons who live together as a couple on a genuine domestic basis

The effect of legislation on constructive trusts in the family

context • The ACT, New South Wales and

Tasmania have expanded their legislative regimes to include claims made by parties in ‘domestic relationships’ (in ACT and NSW) and ‘personal relationships’ (in Tasmania)

The remaining importance of equity

• Not all relationships

• Equity preserved

• Deceased parties

• Third parties

constructive trusts associate professor cameron stewart

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