The best-established application of the principle of a constructive trust arises where a trustee obtains benefits using trust money. However, the principle is wider. Where the trustee takes advantage of his position, in order to obtain benefits which he would not otherwise have received, he must generally hold these benefits under the trust itself, by way of constructive trust. It is said that this further constructive trust is a “graft” on the original principal trust.
The principle applies, even where the trust itself could not have taken advantage of the opportunity or benefit. It follows from the principle that trustees must be beyond reproach. He may not take advantage of his position nor may appear to do so. He may not judge the matter of conflicts of interest himself.
In some cases, the trust deed (or will trust) itself, may permit the trustee to do what might otherwise be a breach of the trust. Most trusts provide some measure of protection against self-dealing and conflicts of interest, on pragmatic grounds. For example, a professional trustee must, of necessity be entitled to charge remuneration.
Where a trustee or other person in a fiduciary relationship derives benefit or profit from his position, the law will require that such benefit is held on behalf of the beneficiaries under the terms of the trust or other relationship. In the case of trustees, this duty is very strict. If, for example, a trustee comes across a business opportunity and avails of it himself he must hold it on trust under the trust. He will have to account to the trust for the profits. If there are losses, the losses will not be borne by the trust. Effectively the trust gets the benefit of any upside but does not suffer any downside.
In the case of trustees, the principle applies irrespective of whether the trust would have been in a position to benefit from the prospective transaction or opportunity. In the case of a trustee, fraud or dishonesty is not required. It is a basic part of the principle that a trustee must not benefit from his office, other than in accordance with a valid charging clause in the trust or will trust.
The principle applies to all fiduciaries, which is a much wider category of persons than trustees. Fiduciaries are persons who stand in a position of authority, influence or power in respect of another. It can include company directors in respect of the company, employers in respect of employees, employees in respect of the employers, confidential information and trade secret, partners in respect of their business dealings (mutual duty of good faith), bankers and solicitors in respect of their clients.
Fiduciaries will be held to the same principles as trustees in relation to dealing with a protected party or with third-party opportunities affecting the assets of the protected party. For example, a company director may come across a business opportunity in the course of business. If he takes advantage of if he will generally have to hold the benefit under a constructive trust for the company if it becomes profitable. As for the trustee, the protected party to whom the fiduciary duty is owed takes the benefit of the upside of the opportunity under a constructive trust.
In some cases, it may be possible for the protected party with independent advice and full knowledge to waive the opportunity in favour of the trustee or fiduciary.
The above principles are not limited to trusts. They apply to others in a fiduciary relationship. A fiduciary relationship applies to a range of circumstances and positions, in which a person might be able to take advantage of a dominant position in respect of another.
A fiduciary relationship applies to personal representatives (to the beneficiaries), company directors (to the company), partners(to each other), joint owners of the property (to each other), solicitors (to their clients), bankers (to their customers) and agents (to the principal). A fiduciary relationship will also apply, where a person is in a position of influence, due to another’s vulnerability.
Fiduciaries do not owe the same strict duties as trustees. However, they must not generally benefit from their position, other than where this is expressly allowed or provided for. There are common mechanisms to provide relief for fiduciaries, for reasons of practical necessity. For example, agents and solicitors may receive remuneration. Company directors may receive remuneration and other benefits from the company, subject to a mechanism which requires disclosure.
The fiduciary may be relieved in the relevant deed, agreement, appointment or company constitution. He may be relieved contemporaneously with the relevant transaction or event in some cases, where the protected party can be shown to have freely consented with appropriate independent advice. Non-trustee fiduciaries may be able to retain the benefits, where they can show that have acted reasonably in the circumstances.
Constructive trusts have been imposed, where fiduciaries, such as company directors, partners etc., benefit from business opportunities belonging to the company, partnership, principal, employer etc. The principle behind a constructive trust is that the particular opportunity is in the nature of the property of the beneficiary or other protected person and belongs to him or it.
Employees may owe quasi-fiduciary duties to their employees, at least in some circumstances and to some extent. This is often expressed as a duty of fidelity / good faith. The duty is not as strict as that which applies to true fiduciaries. Where there is a breach of the duty, for example involving the misappropriation of proprietary information or a business opportunity, a constructive trust may be imposed.
No Prior Fiduciary Duty
Constructive trusts may be imposed where there is no existing fiduciary duty or relationship between the parties. Where the circumstances are such that it would be inequitable for the owner to deny another’s rights, a constructive trust may be imposed.
On the signing of a sale contract, the seller becomes a trustee for the buyer, for some purposes. Pending payment of the purchase price, the effect of the constructive trust is that the seller must take care of the property concerned. The “trust” in this case, is not as extensive as an expressly created trust. The seller is entitled to retain the profits and rents of the lands. The seller has a lien on the property until the purchase monies are paid. He must not exercise his rights in a way that jeopardises the buyer’s interests.
A consecutive trust may arise in relation to so-called mutual wills. Mutual wills are relatively rare. Where two parties make wills in similar terms (typically a husband and a wife benefiting children), there may an express or implied agreement that the will should not be revoked without the consent of the other, so that the survivor may not revoke it at all. If the survivor revokes the agreement, benefits taken under the later will may be required to be held as constructive trustees on behalf of the beneficiaries under the revoked mutual will.
Where third parties come into possession of trust property, they may be required to hold it on a constructive trust for the beneficiary. This depends on the circumstances and their knowledge of the trust position. A third-party may receive trust assets with knowledge, express or imputed that it is transferred in breach of trust. In this case, he may be obliged to account to the beneficiaries for the trust asset received.
A person who intermeddles with trust assets may be obliged to account to the beneficiaries, as constructive trustee in relation to the trust assets which come into his possession. The duty to account may arise, even where the third party is not actually aware of the breach of trust, in circumstances where he should be so aware, and deemed to have notice.
A bona fide buyer for value of the trust assets will not be affected by the above principle. However, in order to be a “bona fide” purchaser, he must not, having made the usual and appropriate investigations, have had reason to suspect the breach of trust. A person who does not pay valuable consideration, such as the donee of a gift, will take the property as constructive trustee even if he has no reason whatsoever to be aware of the breach of trust.
What is required by way of the investigation depends on the type of asset. Real property purchases are formal and the seller’s title must the investigated. In the case of most other asset types, no investigation is required, so that in the absence of actual notice of breach, a purchaser will not normally be deemed a constructive trustee.
The principles of tracing may involve the application of a constructive trust. Where a third-party, (commonly a bank) receives monies which are known or suspected to be dishonestly or fraudulently diverted, they may be themselves be liable to account as constructive trustees.
They need not be dishonest. It is enough that they wilfully shut their eyes to what is obvious. They may wilfully or recklessly fail to make inquiries, which an honest and reasonable man would make. They may be aware of circumstances which would indicate facts to an honest or reasonable man or put him on inquiry in relation to further facts.
Constructive trusts as a remedy
See our generally the sections on restitution and unjust enrichment. Constructive trusts may be imposed to confer a beneficial interest on the basis of a party’s reasonable expectations, in accordance with the principles of estoppel. In such cases, the persons who are the legal owner of the property or asset, are obliged to hold it on trust, or as the court directs, in order to do justice.
Where third parties deal with trust property without having paid for it, the equitable remedy of tracing allows the assets to be recovered. See the section on equitable remedies. In effect, a constructive trustee may be imposed on third parties who receive or meddle with trust property either with knowledge of the breach of trust, dishonesty or for no value. If a third party, in good faith and for full consideration without notice of the trust, deals with the trustee he will generally take ownership of the assets free from the trust obligation.
Another instance of a constructive trust is where a seller received the purchase monies for a property but does not transfer legal title to the buyer. When the purchase monies are paid, the seller becomes a bare nominee / constructive trustee for the buyer. This technique was commonly used to avoid stamp duty under so-called “resting in contract” arrangements. The buyer took his equitable title under the trust and avoided the trigger for stamp duty, by not taking a deed of transfer of the legal title.
A constructive trust may be applied as a remedy by a court in order to do justice. The imposition of a constructive trust is in the nature of an equitable remedy and equitable principles apply to its application. It does not depend on the existence of an express trust, created by the party, the subject of the order. The constructive trust requires that the person concerned holds an asset as trustee for another. Constructive trust commonly involves ownership of land or rights in land.
Constructive trusts are commonly imposed where a trustee, or another person in a fiduciary relationship, derive some benefit from the trust or relationship, to which he is not entitled. In cases such as these, where the imposition of a constructive trust is well established, it arises y automatically in effect, in the circumstances concerned.
The origin of the constructive trust lies in the principle that courts of equity as courts of conscience, will not permit a person in whose name legal title is taken, to retain it where this would amount to fraud or wrongdoing. In this context, fraud does not necessarily mean criminal fraud. It includes an abuse of a fiduciary position, a relationship of undue influence or other inequitable conduct.
Mutual Wills and Family Cases
Although a will may be revoked at any time, it is possible for persons to make mutual wills. This may involve a contract or equitable obligation between the parties, by which they agree to leave property to specified beneficiaries. Where two parties make a will in pursuance to such an agreement, a constructive trust may arise, if one party breaches the agreement by revoking his will. The personal representative and alternative beneficiaries hold subject to a constructive trust is imposed for the benefit of the original beneficiaries.
In order for wills to the mutual in the above sense, it is not enough that parties, for example, husband and wife, make the a will in the same terms at the same time. There must be a demonstrable actual agreement that the wills are to be irrevocable without mutual consen.. A moral obligation or an agreement in honour, is insufficient. The common scenario, by which spouses sign make wills, typically giving everything to each other, if the other survives and everything to their children on the death of the survivor, would not, absent specific agreement or circumstance giving rise to an estoppel, create mutual wills.
The UK and Irish courts have imposed constructive trusts in situations where persons have given up benefits and / or come to share a household with another, with the expectation that they would have certain benefits (for example, that an interest in the property in which they lived) would be left to them under the will of the owner or part owner.
In such cases, the courts may find or infer an agreement that property should be owned in a particular way, and may impose a trust on this basis. In some cases, there may be something short of an agreement, whereby one party is induced to believe he or she will receive a benefit and acts to his detriment on foot of this belief. A trust is imposed in order to do justice on the basis of proprietary estoppel. The courts are willing to impose a constructive trust in order to do justice.
Broader Concept of Constructive Trust
A broader principle of constructive trust has been put forward by some authorities in recent years. Under this principle, a constructive trust would be a much broader remedy, which would be invoked to counter the effects of unjust enrichment. On this approach, constructive trusts might be applied more widely, than under the more well-established categories, which are set out above.
Constructive trusts may overlap with so-called “proprietary” estoppel. Where a person acts to his detriment in reliance on an express or implied representation made by another in relation to property, that party may be precluded from changing the representation or statement of affairs, on which the other has relied to his detriment The remedy in many cases of proprietary estoppel, is the imposition of a constructive trust is imposed on the defendant in relation to the property concerned.
The imposition of a constructive trust creates proprietary rights over particular assets. This can be critical in the context of insolvency. It gives the opportunity to assert rights against an asset or other thing, which holds good against the entire world. This gives superior rights to those enjoyed by unsecured creditors.
A so-called “new model” constructive trust would be in the nature of a wide ranging remedy against unjust enrichment. The Irish and UK courts have been reluctant to allow a remedy which might be nebulous and be based on subjective notions of what is fair and just in particular circumstances.
Neither the restitutionary concept of unjust enrichment nor the general remedy of a constructive trust, have developed in a systematic fashion in Ireland or the United Kingdom, in the same manner as in American jurisdiction.
The principles of unjust enrichment and constructive trust are firmly established in North American jurisdictions. In Canada, the receipt of a benefit by the defendant at the plaintiff’s expense, in circumstances whereby it would be unjust to allow the defendant to retain it, may lead to the imposition of a constructive trust. In the United States, the Restatement of Restitution law mandates a general principle of unjust enrichment, coupled with the remedy of a constructive trust.
The equation of unjust enrichment and the remedy of a constructive trustee, has been criticised. Some forms of unjust enrichment are personal in nature, and it is argued that they should not involve the imposition of a proprietary remedy. On this view, unjust enrichment of itself should not be a basis for a constructive trust, unless some other element is present, which justifies the availability of a proprietary remedy (which defeats unsecured creditors in insolvency).
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