Constructive Trusts

Question 1

How does a CT arise?

Answer 1

By opreation of law, but unlike an RT, it gives no regard to the intention of the parties

Question 2

Are there any formalities required for a CT?

Answer 2

No, as they are imposed by law

Question 3

Types of CT

Answer 3

• Institutional CTs

- Remedial CTs

Question 4

How do institutional CTs arise?

Answer 4

Come into being on the happening of a particular event, judges merely identify the circumstances under which they arise, thus no judicial discretion

Question 5

What is the significance of the fact that institutional CTs exist at the time of the relevant circumstances?

Answer 5

• Proprietary rights and obligations exist from this time
• May give priority to the party with the proprietary interest over another third party
• Extremely important in the insolvency context

Question 6

What do remedial CTs provide a remedy for?

Answer 6

Unjust enrichment

Question 7

Are remedial CTs recognised in the UK?

Answer 7

No, Westdeustche

Question 8

Westdeutsche Landesbank Girozentrale v Islington LBc 1996

Answer 8

F: LA in a contract with a bank for a loan, 10 years to repay the sum but it became apparent the contract was void ab initio, bank sought to recover money but money already spent
I: Did the bank have any claim for the sum?
H: Not a resulting trust as money already spent, no constructive trust since no one’s conscience affected, at most they would have a personal claim in restitution

Question 9

Categories of institutional CTs (8)

Answer 9

• Common intention
• Specifically enforceable contracts
• The equity in Pallant v Morgan
• Unconscionable retention of money paid by mistake
• Setting aside a voluntary transaction made by mistake
• Proceeds of fraud and theft
• Breach of undertaking
• Fiduciaries de son tort

Question 10

Adekunle v Ritchie 2007

Answer 10

F: The mother died intestate and the house was her only asset, she purchased it under the right to buy scheme and her son agreed to be a party of mortgage so the house was conveyed to them both in law, after the mother’s death the daughter continued to pay the mortgage, the son claimed that he had paid when she was still alive
I: Was there a CT?
H: Yes, the son had a beneficial interest, this takes constructive trust beyond cohabitation and towards familial cohabitation

Question 11

CTs in specifically enforceable contracts

Answer 11

When a purchaser enters into a contract for the sale of land, the vendor holds that property on CV for the purpose, and CT arises because of the maxim: equity treats as done what’s ought to be done

Question 12

The equity in Pallant v Morgan

Answer 12

Arises when A and B reach an agreement that A will acquire a land, but in doing so, they will acquire the land for A and B and:

• the agreement confers a benefit to A
• causes a detriment to B
• it would be unconscionable for A to step back from the agreement to B unless if A communicates this to B beforehand giving B time to purchase the property themselves
• where A fails to share the property with B

Question 13

Pallant v Morgan 1953

Answer 13

F: P and M two neighbours interested in purchasing a parcel of land, M suggested that they’d get a lower price if only one of them bids, there was a clear oral declaration that M’s bid was for both their benefit, M won the land and then claimed its was his
I: Was the land really M’s?
H: M must try to find an agreement with P as to shares, if not, he’d have to sell the land and the profits would have to be divided between the two of them

Either a CT or an implied trust

Question 14

Chase v Manhattan Bank 1981

Answer 14

F: C was instructed to pay money to the D, but it paid the sum twice by mistake, D went insolvent, and C wished to claim the money back, without waiting in the insolvency queue
I: Was that possible?
H: CT-C could recover the full sum, because the money was held on trust from the moment it was received

“a person who pays money to another under a factual mistake retains an equitable property in it and the conscience of that other is subjected to a fiduciary duty to respect his proprietary right”

Question 15

Pitt v Holt 2013 - 3 requirements for the transaction to be set aside on grounds of mistake

Answer 15

• The donor under a mistake at the time of the disposition
• The mistake must be relevant to the legal effect of the transaction or the existing fact
• The mistake must be of such gravity that it would be unjust to retain the dispositions

Question 16

Rouchefoucauld v Boustead 1897

Answer 16

F: Land was transferred to the defendant on the understanding that it would be held on trust for the Comtesse de la Rochefoucauld however, this was never actually put into writing, D mortgaged the property, the Comtesse sought a declaration that the defendant held the property on trustD, argued the trust was not enforceable due to lack of writing.
H: Equity will not allow a statute to be an instrument of fraud, to deny the existence of the trust would amount to a fraud on the Comtesse, the trust could be evidenced by oral evidence

Question 17

What is the historical position on the existence of CTs in bribes and secret commissions cases?

Answer 17

No CT

Question 18

Lister v Stubbs 1890

Answer 18

F: Stubbs was employed by Lister to purchase some stuff monthly at a market price, but he was also receiving secret commissions based on these sales, money he earned then invested in a property
I: Did Lister have a proprietary interest in the commissions?
H: No, the secret commission was not part of Lister’s assets and the relationship was between a creditor and ad debtor, thus personal

Question 19

AG for Hong Kong v Reid 1994 (Privy Council)

Answer 19

F: The former director of public prosecutions of Hong Kong was receiving bribes for not prosecuting, bribes then invested in properties in New Zealand which turned out to be very profitable
I: Was there a CT?
H: Yes - CT of the bribe money and any increase in the money in favour of the Crown, CT came into being on receipt of the bribes

Possibly a policy judgment - “bribery is an evil practice”

Question 20

Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd 2011

Answer 20

F: Some bribery going on
I: Is Reid correct - do the beneficiaries have a proprietary interest?
C: No, the claimant could not get a proprietary interest rather than an equitable account for the money acquired in breach of trust, unless it had already been beneficially the property of the beneficiary, or the trustee acquired it by taking advantage of an opportunity or right that was properly that of the beneficiary

Two circumstances identified in which a fiduciary obtains a profit in breach of fiduciary duty:

• Where asset used by fiduciary belonging to the principal - CT
• When fiduciary takes advantage of an opportunity which was properly that of the principal - CT
• All other circumstances - no CT

Question 21

FHR European Ventures LLP v Cedar Capital Partners LLC 2014 - a constructive trust will arise where

Answer 21

• Where the fiduciary uses an asset belonging to the principal (i.e. derives a profit from misappropriation of the principal’s property)
• Where the fiduciary takes advantage of an opportunity which was properly that of the principal
• Where the fiduciary accepts a bribe or secret commission in the course of their fiduciary duties
• In all other circumstances where a fiduciary acquires a benefit in breach of fiduciary duty

Question 22

Practical effect of FHR

Answer 22

Principal can elect between a personal or proprietary remedy