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Constructive Trusts Notes

BCL Law Notes > Irish Trusts Notes

This is an extract of our Constructive Trusts document, which we sell as part of our Irish Trusts Notes collection written by the top tier of University College Cork students.

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CONSTRUCTIVE TRUSTS: TOPIC 4

DEFINTION:
- Snell, "Principles of Equity".
No statutory definition of a constructive trust has yet been enunciated and perhaps none ever will, for the concept is still uncertain and its boundaries obscure.

- Hanbury & Martin.
Residual category which is called into play where the court desires to impose a trust and there is no other suitable category available.

 Constructive trust arises through the operation of equity, where it is in the interests of justice and good conscience to do so irrespective of the intentions of the parties.

- Keane: the fact it comes in to play irrespective of the intentions of the parties is what distinguishes it from other forms of trusts, they are not set out to be created on purpose,
equity imposes them.
- Similar to resulting trusts, in the sense constructive trusts do not have to follow the Statute of Fraud 1695, formal creation requirements. CONSTRUCTIVE TRUSTS: TOPIC 4

1. CONSTRUCTIVE TRUSTS ARISING IN THE MORE INSTITUTIONAL WAY
THROUGH THE CONTEXT OF A FIDUCIARY RELATIONSHIP.

I. Advantages Gained by Persons in Fiduciary Positions.

- Re Coomber (1911), Fletcher Moulton J;
Fiduciary relationships are of many different types, extend from the relation of myself to an errand boy who is bound to bring back my change, to the most intimate and confidential arrangement which can possibly exist between parties where one party is wholly in the hands of another because of an intimate trust in him.

- McMullen v. Clancy (no.2) 2005 IR Fennelly J, accepted the English definition of fiduciary in Bristol & West Building Society v. Mothew [1998].

A fiduciary is someone who is undertaken to act for or on the half of another in a particular matter in circumstances which give rise to a relationship of a trust and confidence

-Fiduciary relationships arise in four principal classes:

1. Trustees and beneficiaries which is the most intense kind of fiduciary relationship.

2. Directors and companies.

3. Principals and agents.

4. Partners in business.

 Concept of fiduciary is slippery, courts look at situation and think a certain result should follow and create a fiduciary relationship to reach their desire result.
 The boundaries of this idea of fiduciary can be ill defined, no fixed list of relationships.
 The courts may at times want to reach a conclusion and work backwards to imply a trust. They tend to blanch out the label quite often and thus as result, the consequences for the different forms of fiduciary relationships can be different. CONSTRUCTIVE TRUSTS: TOPIC 4
 Brown Wilkinson = concept of reach me down a fiduciary, like fixing something under the sink and hand me a spanner, the relationship of fiduciary is a tool judges use to reach result they want.
 Approach exemplified by ex parte James; stating that every time a fiduciary makes a profit from their fiduciary role it has to be held on a fiduciary trust again highlighting the point of deterring against the idea of a fiduciary benefiting from a trust.

- Key concept is that a fiduciary cannot benefit from an abuse of their position in terms of making a profit and subsequently, the caselaw has indicated that any profit made through abuse of one's position is to end up on constructive trust for the beneficiary.

- Kelly v. Kelly (1874), Chatterton VC;
It is the great principle that no person in a fiduciary position accepting any benefit attributable in any degree to that fiduciary position can be allowed to enjoy such benefit from himself.

Keech v Sandford - LEADING CASE.

 The lease of a market was held on trust for an infant and the holder of the reversion renewed the lease for the trustee, although he would not do so when the trustee tried to have the lease renewed for the benefit of the in
 Held that the renewal should be held on a constructive trust for the infant.
 It was irrelevant "that the settlor would probably have been perfectly happy for the trustee to have the lease if the object of his benevolence could not. It was equally immaterial that the trustee's conduct was not in any way dishonest or fraudulent".
Keane [13.05].
 Constructive trust imposed for the beneficiary with the aim of deterring the trustee.
 Principle in Ireland has been acquired the horticultural description of "graft", the idea here is "that the renewal lease derives its sap from the old lease which was held in trust,
and consequently cannot be treated as though it had an independent life of its own capable of being enjoyed by the trustee without regard to the stock whence it sprang" - CONSTRUCTIVE TRUSTS: TOPIC 4
Keane [13.06]. Dempsey v. Ward new lease will not be treated as the old stock if original lease was surrendered or ejected.

Gabett v Lawlor- KEECH V. SANDFORD applied rigidly here….
 No person in a fiduciary capacity shall be allowed to retain any advantage gained by him in his character as fiduciary - e.g. if a trustee obtains a renewal of lease on property which he holds on trust for beneficiaries, he does not retain it, but holds it on a constructive trust for the beneficiaries.
 This case also extends the principle of reversion, meaning that the trust property lease that the trustee is holding onto for the beneficiary and the trustee acquires the landlords interest.
 Approach here subject to the exception in the context of tenancies for life, and found it should apply in all instances.

- In a series of English cases however, it has been said that the principle will not apply to the purchase of reversion unless, the beneficiaries interests are prejudiced by the purchase.

Protheroe v. Protheroe- A husband held a leasehold interest in the family home which it was agreed he held on trust for himself and his wife in equal shares.

After the parties had separated, the husband bought the freehold reversion.

Held that, the wife was entitled equally with the husband to the proceeds of sale of the freehold.

It is a long and established rule that if a trustee who owns the leasehold, gets in the freehold, that freehold belongs to the trust and he cannot take the property for himself.

Constructive trust arises whenever lessee trustee buys the reversion.

It is seen that this decision would not be applied in Ireland, due to the lack of precedent used in the case itself.

Competition with the trust business:
- Trustee would set themselves up in a business that would compete with another business that was the subject matter of the trust & courts don't allow this on the basis of a conflict of interest. CONSTRUCTIVE TRUSTS: TOPIC 4
- It is a 'rule of universal application' that a trustee or other fiduciary 'shall not be allowed to enter into any engagement in which he has or can have a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect'. Keogan, Mee and Wylie Law and Taxation of Trusts (2007), [11.009] Citing Re Thompson.

Moore v. McGlynn
 A shopkeeper and postmaster gave all his property to his brother and son, to be held on trust for his wife and children and provided that the brother should run the business for the benefit of the family.
 It was rejected that the trustees own business should be held on constructive trust but it was grounds for removing him as trustee due to the conflict of interest.
 Held that, being a gift from the Crown, the office was personal and he was not liable to the testator's estate for the salaries and profits derived therefrom.

Re Thompson
 Stricter approach seen here, where the trust property was a yacht brokerage and trustee wanted to set up his own yacht brokerage, so an injunction was granted to prevent him from setting up his own company.
 Specialist nature of business here might be an indication as to why the court was so strict, however.

Sherrard v Barron (CA)
 An agent cannot without the knowledge of his principal make any profit for himself out of services rendered to his principal - should he do so a constructive trust will be imposed.
 Equally it is the duty of the agent to make the fullest disclosure to his principal of all transactions in which the agent is making, directly or indirectly, a profit out of his principal.

Boardman v. Phipps- Classic Illustration of an agent in a fiduciary relationship.
 One of the applicant was the solicitor to the trustees of a number of shares in a company which they held on trust for the respondents. CONSTRUCTIVE TRUSTS: TOPIC 4
 Using the knowledge they obtained in this capacity, they successfully acquired the controlling interest of the company, buying all the other shares and making profits personally and for the beneficiaries, leaving a surplus of capital available after the winding up of the company.
 Whilst all of their actions had been in good faith at all times, the HoL held that they had only been able to make a profit due to the confidential information they acquired through the fiduciary relationship to make an unauthorised profit and so were unable to retain the profit for themselves.
 However, the house of lords in a 3/2 majority awarded Phipps 5/18ths of the profits,
being quite generous on the work they had undergone, because the court recognised that not all trustees are of malign disposition.
 Key to note here though whilst an overall generous decision is that, regardless of the presence or absence of mala fides, a fiduciary cannot exploit their position to make an unauthorised profit, and thus, the courts take a strict approach.

Regal Hastings v. Gulliver

 A company owned a cinema and bought a couple cinemas to sell them all together and make a profit.

 However, the company did not have enough money to do this and as result the
Directors invested personally using their positions to acquire shares in a subsidiary and selling them at once for a considerable profit.
 The applicants sought to recover the profits thus acquired.
 Held that, the rule of equity which requires those who make a personal profit through the use of a fiduciary position, does not depend on fraud or mala fides, but only on the fact of a profit being made.
 The directors of company stand in a fiduciary relationship to that company, thus were not allowed to keep the profits.
 Lord Russell, "The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account".

- In Ireland, there is now specific legislation surrounding this, s.228 of the Companies Act

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