Constructive trusts

  • Created by: Nikki
  • Created on: 13-04-16 13:12


'imposed by law' --> doesn't necessarily mean thatt contrary to settlor's intention, but means that reason for recognising trust is sometimes other than to give effect to settlor's intention

Why impose constructive trusts?

  • some attempts to locate a single principle or idea which can be said to underlie all instances of constructive trusts
  • statement by Cardozo J --> but this statement tells us almost nothing as to when and why a constructive trust arises, and fails to identify some common or defining feature of constructive trusts
  • unjust enrichment
  • unconsionability 
  • clear taht there is no single principle which underlies and distinguishes all constructive trusts
    • catch-all class
    • various reasons 
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Recipient of trust property

IF T transfers property to C (not a bona fide purchaser), equitable title held by B will survive the transfer of legal title from T to C --> C will now hold property on trust for B

argument that trust should be classified in same was as initial trust --> B's equitabl einterest remains unchanged throughout --> interest in property he is asserting against C is same as he had when property vested in T
- although identity and often duties owed by trsutee have changed, interest of beneficairy has not
- suggestion that we should say C is a constructive trustee of an express trust

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Specifically enforceable duties to confer assets

(1) A is under an oblgiation to transfer specific property to B
(2) This oblgiation is one which teh court will order to be specifically performed 
(3) A will hold that property on constructive trust for B from moment that obligation arises

Such trust only arises where this is both an oblgiation to transfer specifically identified assets and that obligation is specifically enforceable

Oblgiation to tranfser land are specifically enforceable

Unusual trust --> pending legal transfer A can use the property for his benefit, but with duty to B to take reasonable care not to damage the property --> in contrast to usual rule that trustees are not to benefit from trust property 

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Imperfect gifts and the rule in Re Rose

Equity will not perfect an imperfect gift --> but exception to this in Re Rose

Where A intends to transfer property outright to B, a trust of that property will arise in B's favour where A has done everything in his power to make the outright transfer effective or where it would otherwise be consdiered unconscionable for A to resile from teh transfer

Pennington v Waine --> apparent extension of the rule made position unclear
- not everything done that could have been done by Ada, but CA concluded that her actions were sufficient ot give rise to a trsut of shares in favour of Harold 
- Arden LJ --> would have been unconscionable for Ada to resile from her gift 
- problematic --> we know what suffices in resepct of shares, but what about other forms of property which have other transfer procedures 

CA decision in Zeital v Kaye
- preference for Re Rose formulation
- court metnioned Pennington without disapproval
- but proceeded on basis that S could establish a beneficial interest in shares only if deceased had done all in his power to effect such a transfer 

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Secret trusts

Wills Act says that a testamentary trust must be signed by testator and two witnesses to be effective

But if testator tells X that
(1) he will be leaving X some asset in his will
(2) he intends that X will hold that asset on trust
(3) X agrees
The court will ensure that X holds that asset on trust for the intended beneficary, even without satisfying the statutory formality 

Fully secret trusts --> where there is no mention of the trust in the will

Half secret trusts --> where teh will mentions the trust but not the beneficiary 

Constructive trusts which arise not to give effect to testator's intentions but to prevent fraud by trustee

Alt view that they are express trust where prevention of fraud justified departure from rule that evidence of testator's intentions can be adduced only if express in form set down (harder to square with statutory rules) 

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Oral trusts of land

By virtue of s53(1)(b) and 53(2) LPA 1925, express trusts of land are unenforceable unless evidenced in writing

But where A and B orally agree that A will trasnfer property to B to hold on trust for A, to prevent the statute being used used as an instrument of fraud, B will be required to hold the property on trust for A notwithstanding the lack of writing 

Doubts as to classification --> express or constructive?

rule in Rochefoucauld

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Property acquired subject to an undertaking

Argument that secret trusts and cases of oral trusts of land are part of a broader cateogry of constructive trusts which arise where B receives property on basis of some undertaking he has made in relation to his use of it
- many of the cases that arise in cases of mutual wills
- Pallant v Morgan equity 
- where A has a right to occupy X's land and X then trasnfers that land to B --> if A's right is not of a kind which would bind B automatically but B agrees nonetheless to give effect to it and allow A to continue occupying the land, a constructive trust will arise to prevent B going back on his undertaking 

Nature of this constructive trust is uncertain and cases have come under a lot of academic criticism

Best view that these are not true trusts but are instead examples where courts have simply imposed an obligation on B to give effect to his undertaking 
- as such all A has is a personal right against B, whereas B remains elgal beneficial owner of relevant property
- if so these provide a further example of language of constructive trusts being used to describe what are not, in truth, trusts at all 

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Common intention trusts of family home

(1) A, who has legal title to land, and B, who doesn't, have a common inention that B si to ahve a beneficial interest in teh land, and
(2) B detrimentally relies on the expectation thereby created
(3) B will acquire some such interest

2 ways to prove common intention
(1) express agreement that C was to have benefical interest
(2) intention inferred from parties conduct --> direct contribution by C to purhcase of property, wehther by paying part of iniital lump sum or by making some of the mortgage payments 

If proving common intention by method (1) then it is necessary to also show detrimental reliance

Quantification of beneficial shares --> wider range of factors and contributions can be taken into account 

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Mistaken transfers

Chase Manhattan v Israel-British Bank

CM mistakenly made same transfer of $2m to IBB twice. IB went into insolvent liquidation

Held: IBB held scond payment on constructive trust for CM

Cf Westdeutsche --> trust only where recipient becomes aware of mistake and hence its 'conscience is affected'

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In Westdeutsche, L B-W held that where A steals B's property or obtains B's property by fraud, A will hold it on constructive trust for B

2 advantages of imposition of trust:
(1) standard remedy for conversion = monetary value of property rather than thing itself --> by contrast, if you can claim that D holds property on trust for you, you can require him to hand the property back to you
(2) legal title may be lost if theif mixes your property with property of his own or some other party --> equitable title, by contrast, is not lost simply by property being mixed with other property --> beneficiary can establish equitable co-owernship of resulting mixture

- fact that theif normally does not acquire true owner's title to property has raised doubts as to how he could be considered a trustee
- but fact tha tthief doesn't acquire true owner's title does not mean he has no title to it
- posession of property with intent to treat property as your own gives you a title to that property, good against all but those with stronger title
- so thief will typicall obtain a title of his own and there is no conceptual objection to his holding thtat title on trust for the true owners so as to enable him to take advantage of equity's more gnerous rules of tracing and recovery 

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Profits derived from breach of fiduciary duty (1)

If a trustee of other fid does, in breach of this duty, make an unaturosied profit, it has long been established that law will require him to give up this gain to beneficiary 

Different ways of doing this --> personal or proprietary 

Trust is imposed when profit is made by misappropriating beneficiary's/principal's property
Trust is imposed (less clearly) when fid takes a profti which he should have made for B/P
But traditionally not in other cases

A-G for HK v Reid 
- R was deputy chief prosecutor in HK which put him in pid position vis-a-vis HK govt
- R was paid bribes so he wouldn't prosecute certain criminals
- bribe money used to buy various properties which had since increased in value
- held: R held properties on constructive trust 

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Profits derived from breach of fiduciary duty (2)

Criticisms of Reid
- result and reaosning criticised
- Templeman supported trust on bais that equity regards as done that which ought to be done
- but this works (to the extent it works at all) only where D is under a specifically enforceable duty to transfer specified assets - but whether there was any such duty wasn't idscussed and so seemed simply to be assumed
- more generally, Templeman believed a trust was necessary to ensure R derived no gain from his breach
- but personal claim could be assessed not at the value of initial bribe but at value of property now 
- moreover a perosnal claim wouldn't havea  negative impact on D's creditors in event of insolvency

FHR v Cedar Capital --> 
- FHR bought a hotel, using CC as an agent in negotiations with vendor. Unkown to FHR, CC also had a deal with vendor weherby it would receive 10m euros if a sale were concluded
- Cedar Captial held money on trust for FHR
- in so holding, SC also held that all profits deriving from breah of fid duty would be held on trust, confirming A-G for HK v Reid

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Trusts, discretion and justice (1)

Proprietary liability

  • concerns typically relate to impact such claims have on TP an din the event of D's insolvency 
  • solution = tailor remedy to circumstances of case, so that TP protection and insolvency prioirty are accorded only where and to the extent that they're considered just

Remedial constructive trust

  • institutional trusts --> fixed by rules
  • remedial trusts --> depend, in part, on exercise of judicial discretion
  • remedial trust pros --> flexibility, so better justice
  • remedial trust cons --> illegitimacy; uncertainty


  • where the court determines whether to recognise a trust it is deciding whether the property of D's should remain his or shoul dinstead by given (beneficially) to C
  • courts are not, absent state authority, entitled to effect any such redistribution of private property
  • but this can't be full trust (cf original of law of trusts and common law)
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Trusts, discretion and justice (2)


  • any reemdial discretion given to courts would necessarily mean uncertainty about parties' entitlments
  • such uncertainty, especiall in relation to property rights, is often suggested to be intolerable
  • but - should we always prefer clear results to just results? Why should certainty trump justice? only if supported by concerns of justice itself

Varieties of discretion

(1) rule-makign discretion --> (a) rule-changing discretion; (b) rule-completing discretion

(2) rule -rejecting discretion 

Rules v discretion

  • not all sorts of discretion are incompatible with rule-based decision-making
  • if remedial constructive trust is to be discretionary in a way which institutional trusts are not, it must invovle a sort of discretion which is opposed to rule-based decision-making
  • but that sort of discretion involves rejecting the idea that like cases must be reated alike, a minimum requirement of justice 
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Trusts, discretion and justice (3)


  • if we want justice, we must treat like cases alike, and if we are to treat like cases alike, we want rules
  • real question then is: what rules?
  • though rules may be necessary for justice, not all rules are just rules


  • common law system, job of setting rules is in part the job of the courts
  • therefore not only undesirable but impossible for courts not to consider the fairness and justness of particular rules and rulings
  • how are courts to set rules other than by consdieration of the justice of those rules?
  • claim that certainty should prevail over justice is itself a claim that can be defended only on basis of justice - parties' interests are better served by imperfect but clear rules than by rules which aspire to better results but at the price of uncertainty 
  • but, as an argument of justice, it can come out on top only once we know what other arguments of justice it is up against
  • and, at least prior to such assessment, no reason to assume it will always come out on top 
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