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Constructive trusts (Constructive trusts are imposed by the law rather…
Constructive trusts
(Constructive trusts are imposed by the law rather than the parties themselves)
Specifically enforceable obligations to transfer specific assets
I will hold a given asset on constructive trust for you if: I owe you an obligation to transfer that very asset to you and That obligation is specifically enforceable (rather than pay damages)
Example: contract to buy land
This means that you get the proprietary right before I perform this obligation of giving you legal title of the land. So that if I got insolvent you have not only a breach of contract but a proprietary right in the land itself, one that takes priority over interests of creditors.
Informal Agreement
Wherever the law requires formality, there is the potential problem of that formality not having been satisfied. what do we do when those formalities aren’t complied with. (in trust formality is required when the property is land and when the trust takes effect on death)
If it is an informal testamentary trust (trust that takes affect after death), the trustee will give effect as intended. If it is an informal trust of land, it’s not clear whether the beneficiaries is as intended or the settlor.
Imperfect Gift
An imperfect gift happens when someone has attempted to transfer property outright, but doesn’t do all the formality.
Equity’s general policy: no trust.
Illustrated by Jones v Lock
Exceptions
Re Rose
Concerned the transfer of shares, which requires formality (donor has to fill in a form and the company has to record you as the new owner). In this case, the court said that as long as the donor, the initial owner, has done his bit (filling in the form) then you get beneficial title. A trust will kick in for your benefit.
Pennington v Waine
Dealt with transfer of shares. There was an aunt (donor) that wanted to transfer the shares to her nephew. But, it doesn’t’ work out because she doesn’t fill in the right form and gives it to the wrong person. According Re Rose, she wouldn’t. But the court said that the nephew deserves the beneficial title, a trust was recognized.
Lady Arden: her argument is that a trust will arise if and when it will be unconscionable (unfair) on the part of the donor to change their mind.
Common intention constructive trusts
Common intention constructive trust requires two elements: common intention between the legal title holder and the person making the claim plus detrimental reliance.
The reason why these trusts are different to resulting trusts, even when your beneficial interest is established through what you paid for, is that resulting trusts are strictly mathematically proportionate (what goes in comes out), not so here. If you pay some of the money towards the purchase of a house and put it in my name, you are entitled to some sort of beneficial interest but not necessarily the money you contributed.
Mistaken Payment
The standard remedy is personal liability. What has been argued at various points is that as a remedy what you ought to get from me is not just a personal remedy but a trust, that you hold the money I mistakenly gave you on trust for you.
Can the claimant claim it as a trust?
Yes: Chase Manhattan v Israel-British Bank
Chase Manhattan paid the bank twice mistakenly, it ended up with 2 million dollars more than it should have done. The Bank goes into insolvency, and so what chase Manhattan wants is to say that the second million dollars was held on trust.
At first instance, the court says yes.
No: Westdeutsche
There was a mistaken payment, the payer thinks there is a debt there, but the debt under which they think it arises is a void contract, and they want to claim a trust. The House of Lord rejects the idea that mistaken payments are trusts, it is not a proprietary claim but a personal claim.
What Lord Brown-Wilkinson says as obiter in Westdeutsche is that he thinks that maybe there should be trust here once the recipient knows or should have found out about the mistake.
Theft
If I steal money from you, and not that you mistakenly gave it to me, the law grants a proprietary remedy.
However, if I steal money from you and put it in my bank account, it is harder to argue that the bank account is yours. The common law would say that the account holder would be the owner of the cash. Equity says that legal title of the bank account might be yours but you are holding the money on trust on the person who you stole from.
Breach of fiduciary duty
It is a duty to act in the beneficiary’s interest
One aspect of this is that fiduciaries are under a duty not to make unauthorized profits. If you are a trustee, you are not made to benefit unless it is authorized.
What if fiduciary does make an unauthorized profit.
Personal liability to the value of the profit (pay the value I have gained)
Proprietary (constructive trust) claim over the very asset received.
Remedy
What the courts have now said is that all gains received by fiduciaries in breach of fiduciary duties are held on trust, even gains like in the Reid case (the money the fiduciary receives is money which would have never normally made its way to the beneficiary). Supreme Court endorsed this in FHR v Cedar Capital.
If the claimant has a personal claim for breach of fiduciary duty, the claimant could become another creditor and pari passu distribution would still apply.If the claim was proprietary, the claimant would get more and the other creditors would get less (if there isn’t enough cash to go around for everyone).
If the defendant has more money owed than he has, people owed money get the proportion of their debts satisfied (pari passu distribution).
Remedial Constructive Trusts
What is a remedial constructive trust?
The idea is this, institutional trusts are trusts whose operations are determined by rules, rules in law. A + B = Trusts. Remedial constructive trusts give courts a discretion over the operation of the trust. Rather than the operation being fixed by rules, the court is given discretion in light of what they think is right.
The debate leads to a broader debate between rules and discretion. The arguments you see turns on whether you think in the end the law is better governed by rules, or give judges more discretion.
Does certainty beat justice?
Rules are better than discretionary with a view to do justice, because justice requires treating like cases alike, and requires same consistency.