Please enable JavaScript.
Coggle requires JavaScript to display documents.
Constructive trusts and fiduciary duties (3) - Coggle Diagram
Constructive trusts and fiduciary duties (3)
Introduction
What are Constructive Trusts?
Despite the name, constructive trusts are real trusts. "Constructive" refers to the way in which they come about
In essence, a constructive trusts is constructed by the court without the need to consider formal declaration in writing
They arise because a set of circumstances happen, and Equity says there's a trust
They're basically trusts by performance of an action/situation
Institutional vs remedial constructive trusts:
Relatively simple to distinguish
Institutional:
arises via operation of law following a trigger event, the court just recognises that the trust has arisen
Remedial:
treats a constructive trust as a remedy that judges have the discretion to award, so the court decides whether there will be a trust
Difference? Whether the court
imposes
a trust
Key point: England and Wales only recognises institutional constructive trusts. Remedial constructive trusts are recognised in other common law jurisdiction such as Australia, Canada and New Zealand
Why recognise (institutional) Constructive Trusts?
Sir Terence Etherton: "The search for an acceptable, universally acknowledged principle for the establishment of a [constructive trust]... Will certainly prove elusive..." (Virgo, p.272)
No one is 100% sure of the exact reasons why a constructive trust arises and Edmund-Davies LJ in
Carl Zeiss Stiftung
suggests that this vagueness may be intentional
But we do have some indication of
why
these trusts are recognised and enforced by Equity
Why impose a Constructive Trusts?
The trigger for (most) constructive trusts does not appear to be intention. So, if it's not intention, what is it?
Unjust enrichment? Controversial and jurisprudentially disputed (Birks,
Unjust Enrichment
, 2nd Edition (OUP 2005) 302)
Justice? But it is based upon an under-defined set of principles and so is particularly uncertain (
Eves v Eves
[1975])
The more likely theory is that constructive trusts arise in response to unconscionability
It's what Brown-Wilkinson LJ suggests in
Westdeutche Landesbank v Islington LBC
[1996]. He said that a constructive trust will only arise where D had
knowledge
which would make it
unconscionable
for her to retain the property
Unconscionability
Unconscionability:
Earl of Oxford's Case
[1615]
In the Court of Chancery: "The Office of the Chancellor is to correct Men's Consciences for Frauds, Breach of Trusts, Wrongs and Oppressions..."
There is clearly a link to what an individual
ought
to have thought
In essence, unconscionability = knowing something which ought to affect your conscience
Does your knowledge make it unconscionable for you to retain property
Exception:
Mention must be made of a common intention constructive trust
Most constructive trusts do not consider the intention of parties, but this one does
The common intention constructive trusts arises where there is an agreement or understanding as to presence and extent of a beneficial interest
Particularly important for cohabitation/Family Law/Land Law, but not important here
Categories of Construcrtive Trusts
Institutional constructive trusts arise in different circumstances
In the textbook, Virgo at 9.3 refers to 'Circumstances in which an institutional constructive trust will arise'
We will call them categories for short
Category 1: Unconscionable Retention:
A constructive trust will arise where D received money by mistake and as such, D's conscience is affected
Key case:
Chase Manhattan
[1981] and
Wesdeutsche
[1996]: Brown-Wilkinson ruled that mere recept of mistakenly paid money is not enough for an equitable interest to arise, D must
know
that it was a mistake
Note how there is a (or perhaps should be!) a direct effect on the conscience of D
Category 2: Fraud/Proceeds of Crime:
A form of unsconscionable retention.
Key case:
Rochefoucauld v Boustead
[1897] - R gave B his property on trust, B morgaged the property, B held the proceeds on constructive trust for R
Again, see Brown-Wilkinson in
Westdeutsche
and Virgo p.292-293 re thief who stole coins holding them on constructive trust for the owner
It's again about affecting the conscience
Category 3: Voluntary Transactions Made by Mistake:
In simple terms, someone gifts property to D by mistake
Key case:
Pitt v Hole
[2013]
3 key requirements:
1) donor must be under mistake at time of transaction;
2) mistake was sufficiently serious (nature of character of transaction);
3) mistake was severely grave (unconscionable for D to retain property)
If these are fulfilled constructive trust will be present
Category 4: Breach of Undertaking:
C transfers property to D, and D undertakes to deal with the property for the benefit of a particular person, then D breaches the undertaking
One example: secret trusts
A type of testamentary trust where a testator/testatrix creates a trust, but the terms of the trust are not disclosed in the will
Fully secret trust: the will suggests a gift has been made, but the recipient takes the property subject to trust obligations
Half-secret trusts: the will suggests a trust has been created, but does not disclose who the beneficiary is
Category 5: Mutual Wills:
A version of a breach of undetaking
2 people, such as husband and wife, agree to execute their wills in a common manner, the survivor has to abide by that undertaking
If the survivor does not abide by the undertaking, a constructive trust arise over the property
Breach of fiduciary duty
What are fiduciaries?
They are someone who owes another person (the principal) onerous duties of loyalty
Bristol and West Building Society v Mathew
[1998]
'The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary"
Fiduciary's role is one of significance and power:
Often have control over something such as property that is owned by someone else or have the ability to contract on behalf of someone else
How is this manifested legally? Trustees who owe fiduciary obligations to beneficiaries but we also see agents who owe fiduciary duties to their principals
Agency
We come into contact with 2 parties always:
Principal: The person to whom the fiduciary duties are owed and who delegates power, and;
The Agent: the person to whom the principal delegates power and the power of fiduciary duties
Difference between Agency and Trust? It's down to proprietary rights:
In agency, the title to any property the agent may deal with never leaves the principal
In a trust, trustee assumes legal ownership of the property being dealt with
De facto fiduciaries:
An individual 'intermeddling' with a trust property as though they held a fiduciary position without having been appointed as fiduciary
Fiduciary will be considered as though they were properly appointed and be subject to fiduciary duties as any other trustee would and hold the property on constructive trust (
James v Williams
[2000])
Duties of a fiduciary:
Overriding duty of a fiduciary is loyalty to the principal
Overriding duty could be said to manifest itself in 2 ways: the no-conflict and the no-profit rules
The rules are strictly applied
Bray v Ford
[1896]:
"It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is as has been said, founded upon principle of morality. I regard it rather as based on consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect."
No conflict rule:
Fiduciaries should not put themselves in a position where their interests could conflict with that of the principal
Self-dealing rule: a fiduciary cannot act for themselves and the principal in the same transaction (i.e. trustees cannot purchase trust property), unless the principal has given their fully informed consent
Fair dealing rule: where a fiduciary personally transacts with their principal, the fiduciary must show they took no advantage of their fiduciary position, they made full disclosure, and the transaction was fair and honest
If a fiduciary is acting on behalf of more than one principal: they must avoid putting themselves in a position where their duty to one principal conflicts with their duty to another, unless both principals have given their fully informed consent
No-profit rule:
Fiduciary cannot make a profit from their position
Some exceptions:
Where the principal has given their fully informed consent following a full and frank disclosure by the fiduciary
Where the profit was authorised in some other way, e.g. where the trust instrument allows the trustee to make a profit
Case illustrations on the effect of rules in practice
Keech v Sandford
[1726]:
Facts: Trustee held property for infant beneficiary; lease of the property ran out, property owner refused to renew as the beneficiary was too young. The trustee decided to lease the property in their own name
Held: "I do not say there is a fraud in this case, yet he should rather have let it run out than to have had the lease to himself. This 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 rule should be strictly pursued, and not in the least relaxed..."
Regal (Hastings) Ltd v Gulliver [1942]:
Facts: Company directors acquired shares in a subsidiary of the company to sell them on and make profit. A question arose over whether they should keep the profit
Held: decided that the no-profit rule applied. Lord Russell:
"The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud... The liability arises from the mere fact of a profit having in the stated circumstances, been made. The profiteer, however, honest and well-intentioned, cannot escape the risk of being called upon to account"
So a constructive trust arose with the directors being made to account
Boardman v Phipps [1967]:
Facts: Broadman (trust solicitor) and Tom Phipps (beneficiary of the trust) spotted a potential opportunity for the trust to make money. They brought it to the trustees who declined the offer (the trust was not able to go ahead), so Boardman and Tom Phipps decided to ask if they could use this option themselves. They obtained approval from 2 trustees, however the 3rd being of ill health, could not consent. Boardman went ahead and acted on behalf of the trustees, and wrote to the beneficiaries asking for their approval - he assumed he had their approval. He was wrong, D profited financially, but primarily the trust profited. C then called on D to account for the profit.
cont:
Majority held (3-2) that usage of information gained through their position as a fiduciary constituted making a profit from trust property - D's personal interest conflicted with their duty to the trust, and they made a profit out of their fiduciary position.
Dissenting argument: they did not act in bad faith and there was no actual conflict of interest on the facts
There's a harsh application and can be criticised, but highlights onerousness of the duties.
Note that Boardman was awarded an equitable allowance for his efforts: does this mitigate or undermines the strict rules?
Gains made in breach of fiduciary duty
There's 3 ways property can manifest following a breach of fiduciary duty:
Property belonging to the principal or property acquired in exchange for the principal's property
Property which did not already belong to the principal but which the fiduciary
should
have acquired for the principal and so which could have become the principal's if the fiduciary had not acted wrongfully
Property received by the fiduciary by virtue of their role as a fiduciary i.e. a bribe or a secret commission
What happens in these situations?
Property belonging to the principal or property acquired in exchange for the principal's property
Property held on constructive trust by the fiduciary for the principal
Property which did not already belong to the principal but which the fiduciary
should
have acquired for the principal and so which could have become the principal's if fiduciary had not acted wrongfully
Property held on constructive trust by the fiduciary for the principal
Property received by the fiduciary by virtue of their role as a fiduciary i.e. a bribe or a secret commission
What should happen here? This is a property received by the fiduciary, which would never have been acquired by the principal
Do the same justifications apply as when the fiduciary made an unauthorised profit from property or an opportunity belonging to the principal?
Constructive trusts are a type of trust that arise by operation of law
Most constructive trusts do not arise in response to party intentions, and instead seem to arise based on unconscionability
Our focus is on constructive trusts that arise as a result of a breach of fiduciary duty
Fiduciaries are those who owe a duty of loyalty to another person: this overriding duty manifests in 2 ways, the no-conflict and no-profit rules
Key points about fiduciary duties:
The no-profit and no-conflict rules are strictly applies as can be evidenced by key cases including
Boardman v Phipps
There are ways of avoiding liability - full and frank disclosure, fullly informed consent of the principal
A breach of fiduciary duty can lead to a fiduciary holding property on constructive trust for the principal
One challenging area has been what should happen when a fiduciary receives a bribe or a secret commission: we'll focus on this next time!