14. Constructive trusts

What makes a trust constructive

A constructive trust arises by operation of law. It does not depend on the intention of the owner. It responds to conduct that makes it unconscionable for the owner to deny another's beneficial interest. In Westdeutsche Landesbank v Islington, Lord Browne-Wilkinson said the conscience of the legal owner must be affected, which means he must know of the facts that make his keeping the property unconscionable.

Fiduciaries who profit

A trustee, and anyone else in a fiduciary position, such as a company director, an agent or a solicitor, must not profit from his position and must not put himself where his duty and his interest may conflict. Any profit he makes is held on constructive trust for the person he serves.

In Keech v Sandford a trustee held a lease of a market for a child. The landlord refused to renew it for the child, so the trustee took the new lease for himself. The court held he must hold it on trust for the child. It did not matter that the child could not have had it. The rule is strict, to remove temptation.

In Boardman v Phipps a solicitor to a trust, and one of the beneficiaries, used information they obtained while acting for the trust to buy shares in a company. They acted honestly and the trust gained a great deal as well. The House of Lords still held that they had to account for their profit, though they were given an allowance for their work and skill.

A-G for Hong Kong v Reid held that a bribe received by a fiduciary is held on constructive trust from the moment it is received, so the principal can trace into property bought with it. In England the Supreme Court confirmed this in FHR European Ventures v Cedar Capital Partners.

Contracts for the sale of land

When a contract for the sale of land is specifically enforceable, the seller holds the land on constructive trust for the buyer until completion, because equity regards as done what ought to be done.

Family homes

Where a home is in one person's name, the other may claim a share by a common intention constructive trust. Lloyds Bank v Rosset set the traditional test. The claimant must show an express agreement, arrangement or understanding that the property is to be shared, plus detrimental reliance. Without such an agreement, an intention to share could usually be inferred only from direct contributions to the purchase price. Stack v Dowden and Jones v Kernott later relaxed the approach in England, especially where the home is in joint names, and allowed the court to look at the whole course of dealing between the parties.

Strangers to the trust

A person who is not a trustee can be liable in two ways.

Knowing receipt: a person who receives trust property transferred in breach of trust, knowing enough to make it unconscionable for him to keep it, must account for it.

Dishonest assistance: a person who dishonestly helps a trustee commit a breach of trust is personally liable, even if he received nothing. Barnes v Addy is the old starting point. Royal Brunei Airlines v Tan held that the test is the assistant's dishonesty. The trustee himself need not have been dishonest.

Secret trusts and mutual wills

Fully secret trusts are often explained as constructive trusts, imposed to prevent fraud. Mutual wills, where two people agree to make wills in a set form and not to revoke them, are also enforced by constructive trust once the first of them dies.