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Trust Law Constructive Trusts And Intermeddling Notes

BCL Law Notes > Equity/ Trust Law: (creation and administration of trusts) Notes

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CONSTRUCTIVE TRUSTS AND INTERMEDDLING

WHAT?

Imposed by equity to satisfy the demands of justice and good conscience
Prevent someone from deriving profit from fraudulent conduct/ taking unfair advantage of a fiduciary position.
Not concerned with the intention - actual or presumed - of the parties such as is the case with resulting trusts.

HKN Invest OY v Incotrade PVT Ltd 1993 IR
A constructive trust arises when:'the circumstances render it inequitable for the legal owner of the property to deny the title of another to it.''comes into existence irrespective of the will of the parties and arises by operation of law.'

The principle:'Where a person holds property in circumstances which in equity and good conscience should be held or enjoyed by another, he will be compelled to hold the property in trust for another.'

TYPES

1. Institutional CTArise by operation of law from breach of fiduciary duty
Recognition of a trust that has already arisen
Court will look at what has happened and will declare it as a constructive trust

2. Remedial CTImposed by the court in exercise of its discretion where fairness demands

Difference?
Westdeutsche Landesbank v Islington BC 1996
LB Wilkinson

1. Under an institutional constructive trust, the trust arises:By operation of law as from the date of the circumstances which give rise to itThe function of the court is merely to declare that such trust has arisen in the pastThe consequences that flow from such trust…are also determined by rules of law, not under a discretion. 2. Under a remedial constructive trust, the trust arises:

'judicial remedy giving rise to an enforceable equitable obligation:
the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court'

Thus a main difference is the consequences and liability of third parties - under institutional
CT, the consequences flowing from the declaration of the trust affecting 3rd parties who in the interim have received trust property, even though unfair, is determined by law.
In the latter case, the court will determine how the trust will affect the positions.
Thus greater degree of uncertainty

Unauthorised trust profits
Gabbett v Lawder 1883The fundamental position:

- 'no person in a fiduciary capacity shall be allowed to retain any advantage gained by him in his character as a trustee'

Keech v Sandford 1726
Market lease was held by the trustee on trust for an infant. Trustee applied for its renewal.
The lessor refused to renew it in favour for the beneficiary due to lack of capacity as they were an infant.
Trustee took the lease off the market for his own benefit - in his own personal capacity.The trustee still held that on trust for the beneficiary.
The institutional CT arose from the circumstances

WhyThe trustee who is a fiduciary cannot exploit the trust for their own gain'the trustee should rather have let the lease run out, than to have had it to himself.'It 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 rules should be strictly pursued

Otherwise trustees could just refuse to renew leases and take them for themselves - flood gates argument.

FIDUCIARIES
➢ Fiduciaries? Agents and directors. COMPETITION WITH A TRUST BUSINESS
Moore v M'Glynn 1894
Gentleman became trustee of deceased brother's estate which included a post office - thus he became legal owner of the property/ became the post-master.A trustee does not necessarily breach a trust if personally in competition with the trust business

unless:
a. actively soliciting customers b. acting in a deceptive or unfaithful mannerIf you act in bad faith, or do any of those, you'll be acting in breach of trust and an institutional CT will arise.

Criticised for being lenient.
Re Thompson's settlement 1868
?????????

AGENTS:
Boardman v Phipps 1967
Boardman was a solicitor, not a trustee, but was an agent of the trust.constructive trustee for the Phipps trust and therefore liable to account for the profits he made.

DIRECTORS:
Industrial development consultants v Cooley
Mr. Cooley was a managing director and became aware that a contract would not be awarded to the company but they would award it to him in a personal capacity.
Left his job at the company pretending to be ill and took up the contract in his own right.The benefits of the contract were held on constructive trust for his original employer - the beneficiary.

Regal Hastings v Gulliver 1942 2 All ER 378
Directors of a cinema company provided the extra share money needed to complete a deal which was very beneficial for the companyProceeds were held on constructive trust for the company even though they were acting bona fides

Advantage that the company otherwise would be interested in but was unable to take that advantageThey made the profits 'by reason of the fact that they were directors…and in the course of the execution of that office'

Exceptions?If the profit is authorised.

Chan v Zacharia 1984A person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain:
(i)

Which has been obtained/ received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit.'

(ii)

Which was obtained or received by use or by reason of his fiduciary position

(iii)

OR of opportunity or knowledge resulting from it

Not unqualified:It will not be a breach if they have been duly authorized, so no obligation to account arises.Must be informed consent given to the agent by his principalIt is the whole profit that must be accounted for.

BoardmanBut court can make independent, equitable allowances to fiduciaries who have generated profit in breach of a fiduciary duty, but basic principle is that they must account for ALL
profits made via that breach

Rationale:'the rule is so to speak, good for discipline: calculated to deter agent from behaving in that way'

To deter fiduciaries from even being tempted to enter into situations where their personal interest may be engaged, and they may be permitted to keep even some of the profit.
The strictness of the doctrine - that they must account for all proceeds of the profit - is to remove any incentive which is natural vis-à-vis human fallibility.

Harris v Digital Pulse 2003 ca

The height and strictness of the standards to protect the principals of fiduciaries by nullifying temptation. In that sense they deter fiduciaries from drifting into a position of conflict, or worse.Deterrent because 'it tends to make the unlawful conduct in question futile.'

Liability

Imposing a constructive trust can have far reaching consequences for third parties
But courts not always clear in their language e.g. in BoardmanProprietary can be forced against the world can trace the property of the trust into the hands of a third party will give you priority if the agent becomes bankrupt.Personal remedy is making a person liable.
Doesn't allow you to trace the trust property into hands of a third party.
Beneficiaries cannot recover profit made on back of this money
No preferential rights if your fiduciary becomes bankrupt

BRIBES AND CONSTRUCTIVE TRUSTS.
➢ If a trustee takes a bribe which comprises the interest of the beneficiary to which he owes the fiduciary duty
➢ Clearly beneficiary wronged and may find the fiduciary personally liableDoes the fiduciary hold the proceeds of the bribe and investments, on CT for the beneficiary? Does that money become the beneficiaries'?

There are conflicting authorities on this
Given rise to a lot of case law and controversy.
Personal liability to account or constructive trust imposed?
Secret commissions or profits obtained from a fiduciary position.

BRIBES
Lister v Stubbs 1890
Relationship was between employer and employee. Lister employed Stubbs to purchase materials for its business. One of the suppliers paid Stubbs bribes of 5.5k, which he invested in freehold properties amongst other investments.
Lister brought action to recover the 5.5k in damages and payment of all other secret profit obtained by Stubbs and a transfer of all of property purchased with the bribes. Tried to obtain interloc.
Injunction to restrain Stubbs from disposing of the investments before trial.

This relationship is of debtor and creditor, not of trustee and beneficiary.Liability to personally account - you simply owe the company the money.Constructive trust does not arise solely be receipt of a bribeIf it was a CT and employee became bankrupt, the employers right would to be to get in line w the other creditors in the event of insolvency.Will not impose a CT where it would give the beneficiary property rights in specific assets where it previously had none.

The bribe was never intended for the company so there was no pre-existing right to the money that the court was enforcing.

Courts distinguished from the other cases - they did not doubt the principle that trust property intended for the beneficiary but intercepted by a trustee is held on ICT or that where a trustee obtains a benefit by acting within his fiduciary capacity, they also hold that on ICT.

COMMISSIONS
Williams v Barton 1927
Williams express trustee of a trust. He was employed by stockbrokers on basis that entitled him to half of the commissions he earned by introducing business to the firm
His recommendation was that his own trust should use the firm to value the trust securities. This is what happened. Trust went to the firm, had the securities valued and he made commissionLiable to account to the trust as CTee.

CHANGE IN APPROACH

AG of Hog Kong v Reid 1994
Mr Reid joined legal service of the Hong Kong Government as a 'crown counsel'. Promoted several times and served as director of the commercial rime unit.
Corrupt - accepted bribes and eventually was convicted under bribery legislation of being in control of money and property disproportionate to his official salary. Sentenced to 8 years in prison and ordered to pay the crown 12.4 mill. - value of the assets derived from the bribes.
HK also brought civil action to recover the bribes, claiming that he held the bribes and any substituted property on CT. Further action sought to register caveats against his properties in NZ -
two were registered in his and his wife's name and the third was registered in the name of a solicitor who was acting as trustee for Reid and his Wife. Assumed that properties were held in trust for reid and that he'd purchased the property with bribes.Fiduciary to the HK government and personally liable for breach of that duty Real Q was whether he held the bribes and any substituted property on trust for the government.
LORD TEMPLEMANThe maxim, 'equity regards as done what ought to be done,' allows court to oblige the fiduciary to transfer the bribe to the beneficiary immediately upon receipt.This caters for a pre-existing rightCT arises as soon as the bribe is received.

GENERAL PRINCIPLE:All bribes are subject to a constructive trust regardless of the source of payment.Properties held on constructive trustFiduciaries obliged to disgorge all profits even if the beneficiary would otherwise not be entitled to it themselves and even if the fiduciaries acted bona fide.

The beneficiary doesn't have to be the original source or motive for payment.

FAIR?

Just? This means the beneficiary gets placed ahead of other creditors
Came to a head:

Sinclair Investments v Versailles Trade Finance ltd 2011
Director of a company entered into fraudulent agreements - breach
Made secret profits off the sale of shares
If he was made personally liable to account, he would have to pay the company back personally but secured creditors could be prioritised and the company as a result gets nothing. however, CT =
company takes priority as beneficiary. In this case, the director was insolvent by the time of judgement - contest between the principal and the creditors.
CA:Personally liable to account

Basically, ignores Reid. Drew a distinction between 3 situations:

1. The fiduciary unjustly enriches themselves by depriving the principal of an assetCT

2. Obtains as asset or intercepts an asset that was meant for the principalCT

3. Makes a profit by reason of the duty in any other situation

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