Contructive Trusts

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This article is a topic within the subject Equity and Trusts.

Contents

Required Reading

M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012), pp. Textbook Chapter 23.

Baumgartner v Baumgartner (1987) 164 CLR 137 (Joint judgment of Mason CJ, Wilson and Deane JJ).

Attorney-General for HK v Reid [1994] 1 AC 324. See now Grimaldi v Chameleon Mining NL (2012) 200 FCR 296 ([569]-[584]).

Chase Manhatten Bank v Israel-British Bank [1981] Ch , 114-115, 124 (at H) – 128 (take care re remarks on tracing). See now Wambo Coal Pty Ltd v Ariff (2007) 63 ACSR 429, [32]-[56] (possible knowledge based trust to reverse unjust enrichment).

Introduction

[1]A constructive trust is imposed by operation of law when it would be inequitable, by reference to established equitable principles, for the defendant to deny obligations of trusteeship. It usually involves the court ordering the defendant to hold property to which he has legal title on trust for the plaintiff.

  • In some situations the award is a personal remedy and the defendant is held liable as if he were a trustee (he is a constructive trustee).
  • Someone who knowingly assists a fiduciary to commit a breach of obligation will be held accountable as a constructive trustee; equity will treat him as if he were an express trustee.

The constructive trust compared with other trusts

[2]Express Trust

- Created by the act of a settlor not by imposed by law
- Intention is not always irrelevant in constructive trusts, as demonstrated by the “common intention” constructive trust, but the source of obligations is always the court

Resulting Trust

- Arises upon proof of the provider’s absence of intention to benefit the recipient
- In a constructive trust, it must be unconscientious for the legal owner of the property to assert full beneficial title

Categories and principles

[3]A constructive trust will not be imposed simply because it would be fair or just to the plaintiff. The claim must be brought within a recognised category of constructive trusteeship.

Constructive trusts and unjust enrichment

Australian law has never accepted unjust enrichment as the basis for the law of constructive trusts.

  • There are many cases where the practical effect of imposing the trust is to restore property to the plaintiff of which she has been unjustly deprived.
  • E.g. the recipient of a mistaken payment can be ordered to hold the payment on constructive trust for the payer.
  • The trust operates here as a restitutionary remedy.

Constructive trusts and unconscionability

At a high level of generality, equity imposes a constructive trust where it would be unconscionable for a legal owner of property to deny the plaintiff an equitable interest.

  • The Baumgartner constructive trust is imposed to prevent unconscionable conduct but proof of unconscionable conduct is not required outside of this category.
  • Even a well-intentioned fiduciary can be held accountable as a constructive trustee.

Constructive trusts and wrongdoing

Some constructive trusts are undoubtedly remedies against wrongdoers but in other cases they are imposed independently of any misconduct on the part of the defendant, for example, a vendor of land holds the legal title on constructive trust for the purchaser until the sale has been completed.

  • Constructive trusts achieve a wide variety of remedial aims.
  • They include the enforcement of a plaintiff’s reasonable expectations, the protection of reliance expenditure, the reversal of unjust enrichment, the prevention of gain by the commission of wrongdoing and the perfection of legally incomplete transactions.

The “common intention” constructive trust and family property disputes

[4] The criteria for imposing this trust were explained by Glass JA:

Allen v Snyder[5]

Facts: The plaintiff and the defendant had lived together as de facto partners for 13 years in the plaintiff’s house. When the relationship broke down, the defendant resisted the plaintiff’s attempts to evict her from the house, claiming that she was entitled to an equitable interest in the property under a constructive trust. There was no evidence that the defendant had made a financial contribution to the purchase or improvement of the property, although she had paid for some of the furniture.
Held: In dismissing her claim, Glass JA identified two criteria for the imposition of a constructive trust:
1. A common intention or understanding that the claimant will acquire interest in the property. This must be either express or inferred from the conduct of the parties.
2. The claimant must have acted to her detriment in reliance on that intention or understanding.


Common intention

The inference of a common intention is easily drawn where the plaintiff has contributed to the price of the property (although in that case they will be entitled to an interest under a resulting trust) or has paid, or made, significant contributions to improvements to the property, and there is no evidence that a gift of the contributions was being made.


Detriment in reliance

Green v Green[6]

Facts: The defendant persuaded the plaintiff to leave her parents in Bangkok and live with him in Sydney. He left here after they had two children. The defendant told the plaintiff that one of the two houses he owned was hers. After the defendant’s death the plaintiff claimed an interest in the house.
Issue: Significant changes in the plaintiff’s life induced by the defendant’s promise amount to detriment.
Held: A majority of the court held that she was entitled to full beneficial ownership in the house by operation of the doctrine of survivorship, as the plaintiff and defendant were registered as joint tenants and her husband held the house on constructive trust for her.
- The statement “This is your house; I bought it for you” established the necessary intention.
- Leaving her family in Bangkok constituted detriment.


Date of effect

A common intention constructive trust takes effect from the date when the plaintiff has acted to their detriment in reliance on the common intention, and not from the date of the court’s judgement.

The Baumgartner constructive trust

[7]In Muschinski v Dodds[8] and Baumgartner v Baumgartner,[9] the High Court developed a new type of constructive trust founded on equity’s traditional concern with the prevention of unconscionable conduct.

  • It enforces the reasonable expectations of a claimant whose contributions to a joint endeavour have created an expectation that they will obtain an interest in property.
  • The expectation of the interest need not be based only on an actual or inferred understanding but can the overall relationship of the parties, including expectations raised by the conduct of one or both parties, will be taken into account
  • This will be limited to the parties’ financial and non-financial contributions.

Muschinski v Dodds[10]

Facts: De facto partners bought a cottage as tenants in common with the intention of developing it as an arts and crafts centre. The plaintiff paid the greater amount of the purchase price on the understanding that the defendant would fund the development of the centre. The project failed and soon afterwards they split up and the plaintiff claimed that she was entitled to a beneficial interest under a constructive trust of more than fifty percent of the property to which she was entitled as a legal tenant in common.
Held: The majority upheld the plaintiff’s claim. The plaintiff was entitled to the greater part of the proceeds of the sale. The constructive trust took effect from the date of the judgement. Deane J identified three criteria for the imposition of the trust:
1. Failure of a joint endeavour
2. The plaintiff must not be to blame for the failure
3. The plaintiff must have contributed money or other property which would not otherwise have been enjoyed by the defendant

The joint venture above was both personal and commercial but not all relationship breakdowns can be characterised as ‘failure of joint venture’ without depriving the term of sensible legal meaning. Modern family law has also largely dispensed with the notion of fault. Despite these difficulties, the decision was applied with a stronger emphasis on unconscionability in Baumgartner.


Baumgartner v Baumgartner[11]

Facts: The parties were living in a de facto relationship, first in a unit owned by the defendant and later in a house built on the defendant’s land. The defendant had purchased the land with the assistance of a mortgage. Mortgage instalments and other costs were paid from a pooled account into which both parties had paid their earnings, the defendant contributing 55% of the account, the plaintiff contributing the remaining 45%. The plaintiff did not pay any money into the account in the months in which she had and was caring for their child. After leaving the defendant, the plaintiff claimed a share in the home under a constructive trust.
Issue: Prevention of unconscionable conduct.
Held: The High Court held that the plaintiff was entitled to a 45% share in the home under a constructive trust. The foundation for the imposition of the trust was held to be where “a refusal to recognise the existence of the equitable interest amounts to unconscionable conduct.”

Assessing contributions

[12]Contributions for the purpose of the Baumgartner trust can be financial, non-financial (so-called homemaker contributions) or both.

  • In Baumgartner, the non-financial contributions of the plaintiff were recognised by crediting her with the amount she would have earned in the months she was precluded from earning by reason of having and caring for their child.
  • Homemaker contributions free the other party to earn money which buys the home and repays the mortgage.
  • Evidence of communal living and sharing of household responsibilities or where the longevity of the relationship makes it likely that the plaintiff made financial contributions can also be taken into account.
  • The above decisions do not provide much guidance on the quantification of the homemaker’s contributions. Relevant factors include the longevity of the relationship, the extent to which the parties shared responsibility for bringing up children and the extent to which the partner’s earning capacity has enhanced by the homemaker’s contributions.

Equitable adjustments

[13] A court may also make equitable adjustments in favour of either party to reflect the benefit of occupying the property enjoyed by one party or the costs incurred in payment of the other’s debts (the mortgage).

  • Equitable adjustments entitle the party to a personal remedy of equitable compensation. The compensation may be secured by equitable lien over the property.


Is the Baumgartner constructive trust an institution or a remedy?

[14]A constructive trust which takes effect from the date of judgement will be classified as remedial. The dating of a Baumgartner constructive trust is matter for judicial discretion. The issue was not discussed in Baumgartner, presumably because no third party interests were affected.

The timing is critical where a mortgage or other security is taken over the disputed property after the plaintiff has made their contributions because it will entitle the plaintiff to priority over later mortgagees (unless they lose priority). A plaintiff may prefer to claim a common intention trust because it is institutional; taking effect when the plaintiff acts to their detriment in reliance.

The impact of family law legislation on constructive trusts

[15]Constructive trust principles are largely irrelevant to the determination of spousal and de facto property disputes in most Australian jurisdictions, following the enactment of wide-ranging legislation empowering Family Law Courts. However, they remain relevant in three classes of case:

1. A couple who are not living together “on a genuine domestic basis” will not constitute a de facto relationship for the purposes of the Family Law Act 1975 (Cth) and a Family Law Court will have no jurisdiction under the Act to alter their property rights.
2. Family property disputes between family members other than spouses and former de facto partners, for example between parent and child.
3. Commercial property disputes. The criteria are of general application.

The constructive trust as a remedy for estoppel

[16]Relief in proprietary estoppel can be personal (Giumelli v Giumelli)[17] or proprietary (a constructive trust) (Thorner v Major).[18]

  • The essential criterion in awarding the constructive trust is the proportionality of the relief to the detriment incurred by the plaintiff.
  • Even if the defendant has represented that the property will be the plaintiff’s in these circumstances, the entire property will not be awarded under the trust if the detriment is very slight.
  • Alternative to constructive trust include awarding the plaintiff an irrevocable licence to occupy the defendant’s property, and equitable lien to secure repayment of the plaintiff’s expenditure on the property or a conveyance to the plaintiff deferred until the plaintiff’s discharge from bankruptcy so as not to entitle the plaintiff’s creditors to the property.

Constructive trusts imposed for breach of fiduciary obligation

[19]The basic requirements for this constructive trust are:

a) Breach of fiduciary obligation
b) The identification of specific property, title to which the fiduciary has obtained by committing the breach

If the fiduciary no longer holds the property, they will remain personally liable 'to account for the money. Knowing recipients and assisters to the breach will also be accountable as constructive trustees.

The standard situations in which a constructive trust is imposed over property obtained by a fiduciary in breach of obligation are:

  • Where the fiduciary misappropriates property belonging to the beneficiary.
  • Where the fiduciary has obtained property for himself, or has diverted to himself a business opportunity, which he was under an obligation to obtain for the beneficiary.

A decision falling into neither category was in Attorney-General for Hong Kong v Reid,[20] where a constructive trust was placed over the money representing a bribe taken by Reid, as well as the profits from its investment. Reid was liable to account to the Hong Kong government, being the primary victim of his corrupt practices. The decision has been criticised because it confers equitable title on the plaintiff over property which they never previously owned, and which the fiduciary was under no obligation to obtain for them, in priority to the claims of the fiduciary’s unsecured creditors.

The constructive trust imposed over stolen money and its proceeds

[21]A fiduciary who steals the beneficiary’s money will be liable to account for the money and any profit made by successfully investing it. Equity can also impose a constructive trust over a non-fiduciary, or thief, who steals money (Black v Freedman). This fills a gap in common law because:

  • Common law lacks an action to specifically recover stolen property, except in the rare case that specific restitution is ordered in a claim for detinue.
  • It is the only proprietary remedy available.

The constructive trust as a restitutionary remedy for unjust enrichment

[22]Logically, this type of case belongs to the law of resulting trusts since the property results back, by virtue of the trust, to the party entitled to the property. Most authorities, however, assume that the trust is constructive.

It is convenient to distinguish between contractual and non-contractual transfers of property:

Non-contractual transfers of property

This category includes property transferred under undue influence or procured by unconscionable conduct. A simple example of this category is mistaken payment. The plaintiff will have a claim of unjust enrichment in this case but it will be useless if the defendant is bankrupt and numerous creditors are claiming his few assets. If the plaintiff can identify her property (i.e. her money in the bank account) by application of tracing rules, a constructive trust can be imposed over the money or its traceable proceeds.

The elements of the proprietary unjust enrichment claim are:

a) The defendant’s enrichment
b) At the expense of the plaintiff
c) The enrichment must be unjust (for example, ‘mistake’ in the case of mistaken payment)
d) The plaintiff’s payment must be traceably identifiable

The classic constructive trust over mistaken payment case, Chase Manhatten Bank v Israel-British Bank,[23] has been criticised for giving unjustified protection to unjust enrichment claimants when many other creditors in bankruptcy, such as tort victims, cannot claim the benefit of a constructive trust.

Westdeutsche Landsbank Girozentrale v Islington London Borough Council[24] suggested that the right to proprietary restitution arose when the recipient’s conscience was bound; the trust should only be imposed when the recipient learns of the mistake or should have learned of it. This suggestion was adopted in the Australian decision Wambo Coal Pty Ltd v Ariff.[25]

Contractual transfers of property

A contract will be voidable in equity on a number of grounds such as undue influence, unconscionability and breach of fiduciary duty. The constructive trust arises when election has been made to rescind the contract.

The doctrine of mutual wills

[26]Equity prevents unconscionable departure from an agreed scheme of mutual wills (between spouses or de factos) by compelling the survivor of the two to hold the property on constructive trust for the intended beneficiary.

  • The leading authority is Birmingham v Renfrew,[27] where a wife bequeathed her estate to her husband, should he survive her, the husband promising that on his death he would leave their property to four of their relatives. The husband was bound by a constructive trust obliging him to leave his estate, including the property received under his wife’s will, to the wife’s relatives specified in the original mutual wills.
  • This constructive trust is unusual, in that the trustee is free to enjoy and dispose of the property received under the first will, as well as his own property, as if he were absolute owner but he cannot make gifts and settlements calculated to defeat the intention of the compact.

Constructive trusts imposed over property transferred under specifically enforceable contracts

[28]In contracts of land or other specifically performable contracts, the vendor will hold the property on constructive trust for the purchaser until the sale has been completed. This is because damages would be inadequate. It is an application of the principle that equity considers as done that which ought to be done. • When the trust takes effect has never been definitively settled (see textbook, p 412). • This trust enables statutory requirements for writing to be avoided, enforcing contracts for land where the law would not. • The application of this trust can enable taxes paid on written instruments, such as stamp duties, to be avoided. • Similar principles apply to where a purchaser gives consideration for future property or other legally ineffective assignments; the vendor will hold the property on constructive trust once it has been received.


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References

Textbook refers to M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012).

  1. Textbook, p 390.
  2. Textbook, pp 390-1.
  3. Textbook, pp 391--3.
  4. Textbook, pp 393-5.
  5. [1977] 2 NSWLR 685.
  6. (1989) 17 NSWLR 343.
  7. Textbook, pp 395-8.
  8. (1985) 160 CLR 583.
  9. (1987) 164 CLR 137.
  10. (1985) 160 CLR 583.
  11. (1987) 164 CLR 137.
  12. Textbook, pp 398-9.
  13. Textbook, p 399.
  14. Textbook, p 400.
  15. Textbook, pp 400—2.
  16. Textbook, pp 402-3.
  17. (1999) 196 CLR 101.
  18. [2009] 1WLR 776.
  19. Textbook, pp 403—6.
  20. [1994] 1 AC 324.
  21. Textbook, pp 406-7.
  22. Textbook, pp 407-9.
  23. [1981] 1 Ch 105.
  24. [1996] AC 669.
  25. (2007) 63 ACSR 429.
  26. Textbook, pp 409-11.
  27. (1937) 5 7CLR 666.
  28. Textbook, pp 411-13.
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