CONSTRUCTIVE TRUSTS AND INTERMEDDLING
WHAT?
• Imposed by equity to satisfy the demands of justice and good conscience
• Prevent someone from deriving profit from fraudulent conduct/ taking unfair advantage of a
fiduciary position.
• Not concerned with the intention – actual or presumed – of the parties such as is the case
with resulting trusts.
HKN Invest OY v Incotrade PVT Ltd 1993 IR
A constructive trust arises when:
- ‘the circumstances render it inequitable for the legal owner of the property to deny the title
of another to it.’
- ‘comes into existence irrespective of the will of the parties and arises by operation of law.’
The principle:
- ‘Where a person holds property in circumstances which in equity and good conscience
should be held or enjoyed by another, he will be compelled to hold the property in trust for
another.’
TYPES
1. Institutional CT
- Arise by operation of law from breach of fiduciary duty
- Recognition of a trust that has already arisen
- Court will look at what has happened and will declare it as a constructive trust
2. Remedial CT
- Imposed by the court in exercise of its discretion where fairness demands
Difference?
Westdeutsche Landesbank v Islington BC 1996
LB Wilkinson
1. Under an institutional constructive trust, the trust arises:
- By operation of law as from the date of the circumstances which give rise to it
- The function of the court is merely to declare that such trust has arisen in the past
- The consequences that flow from such trust…are also determined by rules of law, not
under a discretion.
, 2. Under a remedial constructive trust, the trust arises:
- ‘judicial remedy giving rise to an enforceable equitable obligation:
- the extent to which it operates retrospectively to the prejudice of third parties lies in the
discretion of the court’
• Thus a main difference is the consequences and liability of third parties – under institutional
CT, the consequences flowing from the declaration of the trust affecting 3rd parties who in
the interim have received trust property, even though unfair, is determined by law.
• In the latter case, the court will determine how the trust will affect the positions.
• Thus greater degree of uncertainty
Unauthorised trust profits
Gabbett v Lawder 1883
- The fundamental position:
- ‘no person in a fiduciary capacity shall be allowed to retain any advantage gained by him
in his character as a trustee’
Keech v Sandford 1726
Market lease was held by the trustee on trust for an infant. Trustee applied for its renewal.
The lessor refused to renew it in favour for the beneficiary due to lack of capacity as they were an
infant.
Trustee took the lease off the market for his own benefit – in his own personal capacity.
- The trustee still held that on trust for the beneficiary.
- The institutional CT arose from the circumstances
Why
- The trustee who is a fiduciary cannot exploit the trust for their own gain
- ‘the trustee should rather have let the lease run out, than to have had it to himself.’
- It may seem hard that the trustee is the only person of all mankind who might not have
the lease, but it is very proper that rules should be strictly pursued
Otherwise trustees could just refuse to renew leases and take them for themselves – flood gates
argument.
FIDUCIARIES
➢ Fiduciaries? Agents and directors.
, COMPETITION WITH A TRUST BUSINESS
Moore v M’Glynn 1894
Gentleman became trustee of deceased brother’s estate which included a post office – thus he
became legal owner of the property/ became the post-master.
- A trustee does not necessarily breach a trust if personally in competition with the trust
business
unless:
a. actively soliciting customers
b. acting in a deceptive or unfaithful manner
- If you act in bad faith, or do any of those, you’ll be acting in breach of trust and an
institutional CT will arise.
Criticised for being lenient.
Re Thompson’s settlement 1868
?????????
AGENTS:
Boardman v Phipps 1967
Boardman was a solicitor, not a trustee, but was an agent of the trust.
- constructive trustee for the Phipps trust and therefore liable to account for the profits he
made.
DIRECTORS:
Industrial development consultants v Cooley
Mr. Cooley was a managing director and became aware that a contract would not be awarded to the
company but they would award it to him in a personal capacity.
Left his job at the company pretending to be ill and took up the contract in his own right.
- The benefits of the contract were held on constructive trust for his original employer – the
beneficiary.
Regal Hastings v Gulliver 1942 2 All ER 378
Directors of a cinema company provided the extra share money needed to complete a deal which
was very beneficial for the company
- Proceeds were held on constructive trust for the company even though they were acting
bona fides
WHAT?
• Imposed by equity to satisfy the demands of justice and good conscience
• Prevent someone from deriving profit from fraudulent conduct/ taking unfair advantage of a
fiduciary position.
• Not concerned with the intention – actual or presumed – of the parties such as is the case
with resulting trusts.
HKN Invest OY v Incotrade PVT Ltd 1993 IR
A constructive trust arises when:
- ‘the circumstances render it inequitable for the legal owner of the property to deny the title
of another to it.’
- ‘comes into existence irrespective of the will of the parties and arises by operation of law.’
The principle:
- ‘Where a person holds property in circumstances which in equity and good conscience
should be held or enjoyed by another, he will be compelled to hold the property in trust for
another.’
TYPES
1. Institutional CT
- Arise by operation of law from breach of fiduciary duty
- Recognition of a trust that has already arisen
- Court will look at what has happened and will declare it as a constructive trust
2. Remedial CT
- Imposed by the court in exercise of its discretion where fairness demands
Difference?
Westdeutsche Landesbank v Islington BC 1996
LB Wilkinson
1. Under an institutional constructive trust, the trust arises:
- By operation of law as from the date of the circumstances which give rise to it
- The function of the court is merely to declare that such trust has arisen in the past
- The consequences that flow from such trust…are also determined by rules of law, not
under a discretion.
, 2. Under a remedial constructive trust, the trust arises:
- ‘judicial remedy giving rise to an enforceable equitable obligation:
- the extent to which it operates retrospectively to the prejudice of third parties lies in the
discretion of the court’
• Thus a main difference is the consequences and liability of third parties – under institutional
CT, the consequences flowing from the declaration of the trust affecting 3rd parties who in
the interim have received trust property, even though unfair, is determined by law.
• In the latter case, the court will determine how the trust will affect the positions.
• Thus greater degree of uncertainty
Unauthorised trust profits
Gabbett v Lawder 1883
- The fundamental position:
- ‘no person in a fiduciary capacity shall be allowed to retain any advantage gained by him
in his character as a trustee’
Keech v Sandford 1726
Market lease was held by the trustee on trust for an infant. Trustee applied for its renewal.
The lessor refused to renew it in favour for the beneficiary due to lack of capacity as they were an
infant.
Trustee took the lease off the market for his own benefit – in his own personal capacity.
- The trustee still held that on trust for the beneficiary.
- The institutional CT arose from the circumstances
Why
- The trustee who is a fiduciary cannot exploit the trust for their own gain
- ‘the trustee should rather have let the lease run out, than to have had it to himself.’
- It may seem hard that the trustee is the only person of all mankind who might not have
the lease, but it is very proper that rules should be strictly pursued
Otherwise trustees could just refuse to renew leases and take them for themselves – flood gates
argument.
FIDUCIARIES
➢ Fiduciaries? Agents and directors.
, COMPETITION WITH A TRUST BUSINESS
Moore v M’Glynn 1894
Gentleman became trustee of deceased brother’s estate which included a post office – thus he
became legal owner of the property/ became the post-master.
- A trustee does not necessarily breach a trust if personally in competition with the trust
business
unless:
a. actively soliciting customers
b. acting in a deceptive or unfaithful manner
- If you act in bad faith, or do any of those, you’ll be acting in breach of trust and an
institutional CT will arise.
Criticised for being lenient.
Re Thompson’s settlement 1868
?????????
AGENTS:
Boardman v Phipps 1967
Boardman was a solicitor, not a trustee, but was an agent of the trust.
- constructive trustee for the Phipps trust and therefore liable to account for the profits he
made.
DIRECTORS:
Industrial development consultants v Cooley
Mr. Cooley was a managing director and became aware that a contract would not be awarded to the
company but they would award it to him in a personal capacity.
Left his job at the company pretending to be ill and took up the contract in his own right.
- The benefits of the contract were held on constructive trust for his original employer – the
beneficiary.
Regal Hastings v Gulliver 1942 2 All ER 378
Directors of a cinema company provided the extra share money needed to complete a deal which
was very beneficial for the company
- Proceeds were held on constructive trust for the company even though they were acting
bona fides
