Constructive Trusts

Question 1

Constructive Trusts

In what circumstances do constructive trusts arise?

Answer 1

CT arises (a) by operation of law (b) irrespective of the parties’ intentions + (c) in circs where it’d be unjust 
for party holding legal title to or possession of property to (continue to) enjoy the benefit of it

Question 2

Constructive Trusts - Agents and Unauthorized Profits

Gabbett v Lawder [1883]:

Answer 2

An agent has a fiduciary position and is obliged to put his principal’s interests before his
Man in fiduciary position who gets an unauth profit holds it on CT for beneficiary

Question 3

Constructive Trusts - Contracts for the Sale of Land

Describe this area?

Answer 3

Courts have held a vendor of land becomes a constructive trustee for
buyer pending completion of sale (s.52 LCLRA 2009)

Question 4

Constructive Trusts - Mutual Wills

Describe this area?

Answer 4

X + Y agree on the death of 1st, all his prop pass to survivor + on death of 2nd, prop pass to a 3rd party (CT)
Re Oldham [1925]: Must have entered a binding agreement that the survivor won’t revoke his will.

Question 5

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger

Barnes v Addy [1874]

Answer 5

Stranger: someone other than the agent + principal i.e. A 3rd party stranger to the fiduciary relationship.

• HOL identified two ways a 3rd party may be liable to acc to a principal for the agent’s conduct:
  (a) Knowing Receipt: If they receive and become chargeable with some part of the trust property
  (b) Dishonest assistance: If they help knowingly in a dishonest + fraudulent design on part of trustees

Question 6

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger

Describe “Knowing Receipt” in this context?

Answer 6

Y was a trustee. Z was the beneficiary. In breach of trust, Y transferred the trust property to A.
 If A was a bona fide purchaser for value w/o notice of Y’s breach, Z can’t recover (Equity’s darling)
 If A knew of Y’s breach of trust, A holds the property on a constructive trust for Z

Question 7

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required

Bank of Credit and Commerce International v Akindele [2001]

Answer 7

Does A have to have actual notice or is constructive notice sufficient?
- D entered agreement w I Ltd, a comp owned by B, to buy shares in B’s holding company. The agreement guaranteed D a return of 15% p/a on investment of $10mn.
- D unaware the agreement was part of a fraudulent scheme by officers of B to enable the holding co buy its own shares. Under it, P paid D $17mn. P’s liquidator argued D held this on CT for P.
- Rejected: Held for D. Held there should be a single test of knowledge for recipient liability: the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.
- Applying it here, held although D may have had suspicions as to the integrity of BCCI at one point his state of knowledge wasn’t such as to make it unconscionable for him to retain the money.
Criticism: ‘unconsc test vague: depends if D got the prop unconscientiously or not rather than his knowledge.

Question 8

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required

Re Frederick’s Inns [1994] Irish courts don’t follow Akindele – knowledge based test

Answer 8

• SC appeared to accept constructive notice would be sufficient to ground liability.
• Directors of a group of cos that were insolvent sold assets of some of the cos and paid Revenue not only the sums owed by the co in question but also owed by other cos in the group.
• Liquidator argued payments for other cos ultra vires as they removed assets from them after they insolvent
• SC held the directors had breached their fiduciary duties. Held Revenue had constructive notice that they’d been obtained in breach of duty bc the memorandum’s of the cos showed the lack of capacity and the memorandums were public documents. Little consideration given to the degree of knowledge here.
  Delany (2011) says this imposes an unnecessarily high onus on people/bodies dealing with a co.

Question 9

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required

Ulster Factors Ltd v Entoglen [1997]

Answer 9

• HC held actual or constructive knowledge of a breach of trust renders a recipient liable. Here, D had no
  actual knowledge + there was no obligation to inquire. SO constructive knowledge couldn’t be imputed.

Question 10

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required

Harlequin Property v O’Halloran [2013]

Answer 10

• McGovern J noted the UK test of unconscionability is a much lower threshold than in Ireland + refused to
  adopt it. D2 (D1’s old dad) escaped liability as MJ felt he was unwittingly dragged into the case by his son

Question 11

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance

Describe dishonest assistance?

Answer 11

Y was a trustee. Z was the beneficiary. In breach of trust, Y took money from the trust fund and use it to buy a house for himself. H was assisted in this breach by A.
 A (who assisted in breach of fiduciary duty) may be personally liable to the principal i.e. may be ordered to pay damages to the principal.
 He is personally liable however he is not a constructive trustee of any property.

Question 12

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Must it be proved that the Agent acted dishonestly?

Royal Brunei Airlines v Tan [1995]

Answer 12

• P appointed a comp its agent. Agent received the money paid on the purchase of tickets for travel w P in trust for P. D was the agent’s managing director + main shareholder.
• D paid the money so received in discharge of the agent’s trade debts owed to 3rd parties.
• Agent became insolvent and P sought relief against D. P’s claim succeeded on basis of D’s dishonest assistance in breach of trust by the agent.
• Held you don’t have to prove the trustee acted dishonestly in breaching the trust.

Question 13

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - What is the degree of fault which A must possess to be personally liable to the principal[al?

Baden v Societe Generale [1993]

Answer 13

Traditionally, it had to be proved A knew he was assisting in breach of a fiduciary duty
- Held it means (i) actual knowledge (ii) wilfully shitting eyes to the obvious (iii) wilfully + recklessly failing to make such inquiries as honest reasonable man would (iv) knowledge of circs that’d indicate the
facts to an honest reasonable man or (v) knowledge of circs that’d put honest reasonable man on inquiry

Question 14

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - What is the degree of fault which A must possess to be personally liable to the principal[al?

Royal Brunei Airlines v Tan [1995]

Answer 14

• Nicholls L abandoned these^ 5 categories and rejected negligence + unconscionability as bases of liability
• Held dishonesty should be the touchstone of liability.

Question 15

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?

Royal Brunei Airlines v Tan [1995] Objective

Answer 15

• Nicholls L identified dishonesty as synonymous w a want of probity + commercially unacceptable conduct
• Confusion: Did he intend the test for dishonesty be subjective or objective?
• Held acting dishonestly means not acting as an honest person would in circs: this is an objective standard
• Then he stated when deciding if a person acted honestly, court must look at all the circs known to the 3rd party at the time + consider his personal attributes such as his experience + intelligence

Question 16

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?

Starglade Properties Ltd v Nash [2010]

Answer 16

• Held there is a single standard of honesty objectively determined by the court. That standard is applied to
  specific conduct of a specific individual possessing the knowledge + qualities he actually enjoyed.

Question 17

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?

Twinsectra Ltd v Yardley [2002] Objective + Subjective - Controversy post Tan

Answer 17

• A solicitor (A) acting for a borrower gave an undertaking to a lender to retain moneys advanced by him pending their application to the acquisition of property by the borrower.
• Contrary to the undertaking, A paid the loan moneys to a 2nd solicitor (B) acting for the borrower.
• B paid the money to the borrower on his order for purposes other than acquisition of prop. Loan not repaid
• The lender sued B alleging dishonest assistance in the breach of trust by A.
• HOL rejected this: Considering Tan, held the test for dishonesty was combination of objective+ subjective
• Test: Before there is a finding of dishonesty, must show D’s conduct was dishonest by ordinary standards of reasonable, honest people + that he himself realised that by those standards his conduct was dishonest.

Question 18

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?

Barlow Clowes v Eurotrust [2006] Back to Objective

Answer 18

• P in liquidation after its fraudulent securities scheme exposed. It took £140m of investors’ money + paid it
  into an Isle of Man comp where Mr H was a director.
• Mr H had a strong suspicion that a misappropriation of investors’ funds was occurring but made a conscious decision not to make inquiries to avoid discovering the truth.
• P’s liquidator argued Mr H dishonestly assisted the dissipation of the investors’ money.
• H argued his state of mind shouldn’t be considered dishonest as, applying Twinsectra, it could only be dishonest if he was aware that would by ordinary standards be regarded as dishonest.
• Privy Council held although dishonesty is a subjective state of mind, the law determines whether it is dishonest by objective standards. Held there was no intention to depart from this standard in Twinsectra

Question 19

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?

Starglade Properties Ltd v Nash [2010]:

Answer 19

Confirms that this is an objective test

Question 20

Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?

Abu Rahmah v Abach [2007]

Answer 20

• Held that Barlow shows how Royal Brunei and Twinsectra can be read together to form a consistent corpus of law: test of dishonesty is predominantly objective
• Sufficient to concentrate on what was said re the element of knowledge in Barlow
  Likely Ireland would follow Barlow given the widespread support it has obtained in the common law world

Question 21

The New-Model Constructive Trust

Hussey v Palmer [1972]

Answer 21

Lord Denning set out new-model CT in Hussey, allegedly based on Lord Diplock’s decision in Gissing [1971]:
- P was D’s mum + lived w D and D’s husband. P spent £607 to build extension to the house. After dispute,
P left house. P claimed she had an interest in the house by virtue of her expenditure.
- Held a constructive trust arose in P’s favour: a ‘new-model CT’.
- This is a trust that is imposed by law whenever justice and good conscience requires it.

Question 22

The New-Model Constructive Trust

Eves v Eves [1975]

Answer 22

• Mr E bought a home + put legal title in his name. His gf (Janet) lived there + asked why she wasn’t an owner. He said it was bc she wasn’t yet 21. Janet decorated + broke up concrete patio w sledgehammer.
• Held Mr E held ¼ share of the house on constructive trust for Janet.

Question 23

The New-Model Constructive Trust

Criticisms?

Answer 23

CRITICISMS: (a) New-model lets judges impose own perceptions of justice (b) it fails to consider the effect
of imposing this: it gives a person a proprietary remedy e.g. creditor stronger claim ahead of other creditors
Although widely rejected in most of the common law world, it appears to be thriving in Ireland

Question 24

The New-Model Constructive Trust

Kenny v Kenny [2019]

Answer 24

• Deceased survived by 3 daughters (incl. D). P was dad of deceased + grandad of D.
• P brought claim in respect of the proceeds of a mortgage protection policy by way of an alleged CT on the basis of the discharge of the annual premium payments by P.
• Held there was no CT here, but said it can arise in circs where a person would be unjustly enriched I they were permitted to attain property. Three essentials to a claim of unjust enrichment:
  (a) The D has been enriched;
  (b) The enrichment was at the expense of the P; and
  (c) The enrichment was unjust.

Question 25

# The New-Model Constructive Trust HKN Invest v Incotrade [1993]

Answer 25

- P got judgment against a co + the individuals responsible for conducting its affairs. Ps sought permission to complete execution of this judgment. - Held a CT arises when the circs of the case render it inequitable for the legal owner to deny another’s title. - If a person holds property in circs that in equity or in good conscience should be held or enjoyed by another, he’ll be compelled to hold the prop on trust for another.

Question 26

# The New-Model Constructive Trust Murray v Murray [1996]

Answer 26

- Deceased lived w P (nephew + next of kin) in D’s house for long time + paid the mortgage instalments + most of the outgoings. No evidence she intended to create a beneficial interest for herself in the house - When she died P argued he was entitled to the beneficial interest as her next of kin + in the circs it’d be unconscionable for D to rely on his legal title to the property. - Absence of D intended to create beneficial interest precluded the HC from holding a RT arose. - However, he held a more flexible CT provided a remedy for P: the law will impose a constructive trust in all circumstances where it’d be unjust and unconscionable not to do so. - Mee (1996) criticised this as HC avoiding addressing the issue that no RT arose by invoking the CT.

Question 27

# The New-Model Constructive Trust Kelly v Cahill [2001]

Answer 27

- Deceased wanted to alter will to leave all property to wife D1 instead of benefiting his nephew D2. - His solicitor advised he should execute a deed transferring his prop into the joint names of him + wife to avoid probate tax. They believed the deed included all of the lands owned by deceased. - Through sol’s inadvertence, some lands not transferred so passed to wife for life w remainder to nephew - Barr J held T had clear intention wife should inherit all property + believed the deed achieved this. - Held justice + good conscience required nephew not be allowed inherit the property: CT in favour of wife

Question 28

# The New-Model Constructive Trust Re Varko Ltd (In Liquidation) [2012]

Answer 28

- P executors of estate of Mrs McCoy. Her son was a director of Varko. She got a judgment finding that she was misled by her son into transferring the proceeds of a re-mortgage of her home to the company in 2010 - During the litigation, Varko went into liquidation + assets bought by co son was connected to by his wife. - Mrs M never informed of the liquidation + liquidator nor creditors told of her claim. - Held a CT arises where property isn’t expressly subject to a trust but is held by a person in circs that it’d be inequitable to allow a person have full beneficial ownership of the property. - Held justice and good conscience requires that the money was held on CT by Varko for Mrs M’s estate.

Question 29

# The New-Model Constructive Trust Finnegan v Hand [2016]

Answer 29

- P worked on farm of deceased for 38 yrs on modest pay. Claimed Dec made no of promises to bequeath it - Court felt a lot of the promises were indirect/oblique. P sued on basis of Prop Estoppel or CT. - Held no PE but CT: a remedial constructive trust is imposed by equity to satisfy the demands of justice + good conscience + to prevent a person deriving profit from fraud/taking advantage of fiduciary position

Question 30

# The New-Model Constructive Trust Re Custom House Capital Ltd [2013] shows a possible retreat

Answer 30

While it appears Irish courts are willing to impose a CT where ‘justice and good conscience’ require it - Finlay G J held a co in liquidation held money on trust for an individual. She said it is important that a requirement of fraudulent conduct on behalf of the co is show before a CT is established