Constructive Trusts Ireland - Constructive Trusts Ireland

Constructive Trusts

• A constructive trust arises:

  1. By operation of law,

  2. Irrespective of the parties’ intentions,

  3. In circumstances where it would be unjust for the party holding legal title/possession to enjoy the benefit of it.

• A constructive trust is not an express trust but is treated as if it were.

• The effect of a constructive trust = it gives property to the person in whose favour it is imposed.

o Significance: if the person on whom the constructive trust becomes insolvent, the person in whose favour the CT is imposed takes priority over the former’s unsecured creditors.

• Certain fact patterns will give rise to a constructive trust the trust automatically arises upon the occurrence of certain fact patterns – the court has no discretion to affirm or deny the trust’s genesis.

• An agent occupies a fiduciary position – he acts on behalf of another (the principal).

• An agent is expected to put his principal’s interests before his own.

• Agent/principal relationships include:

• Trustee/beneficiary

• Director/company

• Solicitor/client.

• An agent may not make an unauthorised profit from his fiduciary position – Gabbett v Lawder (1853).

• Moore v McGlynn – D held a business on trust for the benefit of his deceased brother’s family. He set up a rival business in competition with the family business. Court held that his new position would disqualify him from remaining any longer a trustee.

• Boardman v Phipps – D’s were a solicitor to and a beneficiary under a trust. Trust held significant number of shares in a private company. Concerned how the company was being managed. They acquired information about the company and decided it would be profitable for the trust if the company sold some assets. They obtained control of the company by purchasing the remainder of the shares and then sold off assets to make a larger profit. The trust benefitted significantly. HoL held D’s were liable to account for the profit as they put themselves in a position in which there was a conflict between their fiduciary duties and self-interest.

• Case demonstrates that:

  • There does not have to be any fraud on the part of the agent; and

  • The principal need not have suffered any loss.

• Directors may not use their position to gain advantages through dealings with third parties – Regal (Hastings) v Gulliver.

• Industrial Development Consultants v Cooley – D was MD of the P company.Tried to secure a contract with the Gas Board on behalf of the company. He failed, but they offered him a contract in his personal capacity. He accepted, pretended he was sick and resigned as MD. Court held that he was a constructive trustee of the benefit of the contract accordingly he was held liable to account for the profits derived from it.

• Traditionally, the courts have held that a vendor of land becomes a constructive trustee of the land for the purchaser pending the completion of sale – Tempany v Hynes.

• S. 52 LCLRA 2009: Entire beneficial interest passes to the purchaser on the making of an enforceable contract for the sale of land. This does not affect the obligation of the vendor to maintain the land so long as possession it is it retained.

• Mutual wills exist where X and Y enter into an agreement that:

• on the death of the first of them all his property will pass to the survivor, and

• on the death of the second of them, all the property will pass to some named third party.

• Where mutual wills have been created, a constructive trust will arise in favour of the third party upon the death of the first testator.

• In determining whether there is a mutual will, the court will look at:

  1. The terms of the wills,

  2. The conduct of the parties, and

  3. The surrounding circumstances.

• Re Oldham – Mere fact that the wills are made simultaneously and on substantially similar terms did not mean that mutual wills had been created (did not mean that the survivor could not revoke his will).

• NB for essay.

• A stranger in this context = someone other than the agent and his principal, i.e. a third party to the fiduciary relationship.

• Barnes v Addy - Lord Selbourne identified two ways in which a third party may be liable to account to a principal for the agent’s conduct:

1. Where they receive and become chargeable with some party of the trust property (knowing receipt),

2. Where they assist with knowledge in a dishonest and fraudulent design on the part of the trustees (dishonest assistance).

• Y was a trustee and Z was the beneficiary. In breach of trust, Y transferred the trust property to A.

• If the third party (A) was a bona fide purchaser for value without notice of the breach of trust, Z cannot recover the property from A.

• If A knew of the breach of trust, A holds the property on a constructive trust for Z.

Degree of Knowledge Required

• Belmont Finance Corp v Williams Furniture – stranger will be liable if they knew or ought to have known of the breach. Did not matter if they acted dishonestly. Case suggests that constructive notice is sufficient.

• Re Montagu’s ST – trustees, in breach of trust, transferred certain chattels to the beneficiary (10^th Duke of Manchester). The situation resulted from an honest mistake on the part of all involved. Megarry VC held that actual knowledge was necessary in order for the Duke to become a constructive trustee.

• BCCI v Akindele – D entered agreement with P for the purchase of shares. Agreement guaranteed D a return of 15% per annum on an investment of $10m. Unbeknownst to D, this agreement was part of a fraudulent scheme by the company trying to buy its own shares. Nourse LJ reviewed authorities and noted that:

  • Proof of dishonesty on the part of D is not required (citing Belmont Finance Corp);

  • Some authorities suggest that constructive knowledge is sufficient, but there has been no in-depth consideration of this as most cases, on the facts, involved actual knowledge; and

  • Baden categories of knowledge are not that useful since they relate to assistance rather than receipt cases.

Having considered the various authorities, he concluded that the relevant test is: the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

• On applying this test, the stranger here did not have sufficient knowledge of the breach to make it unconscionable for him to retain the money.

• This decision can be praised because it introduces consistency by setting out a single test for knowledge.

  • However, it has been subject to criticism for the use of ‘unconscionability’ as the basis - vague.

  • Martin: Still unclear the distinction between dishonesty (which is not required) and the degree of knowledge making it unconscionable to retain the property at what point has D acted unconscionably?

• Irish position: Re Frederick Inns – SC appeared to accept that constructive notice would be sufficient. Four companies within a group of companies were wound up. Funds arising from the windings up were then used to pay off Revenue debts belonging to other companies within the same group. SC held that the payments were misapplication of company funds by the directors in breach of their fiduciary duties. Revenue, when it received these monies, had constructive notice that the monies were obtained in breach of duty.

  • Delany: this approach adopted by the SC arguably imposes an unnecessarily high onus on persons or bodies dealing with a company. Also, the SC made no attempt to distinguish between the standard required in relation to commercial and non-commercial transactions.

• Ulster Factors v Entoglen (1997) – HC held that actual or constructive knowledge of the breach of trust will

render a stranger to the fiduciary relationship liable as a constructive trustee.

• Fyffes v DCC (2005) – Laffoy J noted that the test in the UK (Akindele – unconscionability) is stricter than the test in Ireland (Frederick Inns – constructive notice).

• Harlequin Property v O’Halloran (2013) – McGovern J noted the UK requirement to show some degree of unconscionability and held that the threshold in respect of the same is significantly lower in Ireland.

• Y was a trustee. Z was a beneficiary. In breach of trust, Y took money from the trust fund and used it for his own use (e.g. to buy himself a house). He was assisted to do so by A.

• A person who assists an agent in breach of fiduciary duty may be personally liable to the principal.

  • This person has sometimes been called a constructive trustee.

  • This is incorrect – no property becomes vested in him as a result of his assistance.

  • Although he is personally liable to the principal, he is not a constructive trustee of any property –

Williams v Bank of Nigeria (2014).

Must it be proved that the agent acted dishonestly?

• Royal Brunai Airlines v Tan – Lord Nicholls clarified that it does not have to be proved that the trustee acted dishonestly in breaching the trust. It would not make sense for a dishonest accessory, whose liability was fault based, to be allowed to escape liability simply because the trustee had not acted dishonestly.

  • This finding has been welcomed in academic circles for bringing clarification to this issue.

What is the degree of fault which the stranger must possess to be personally liable to the principal?

• Traditionally, it had to be proved that A knew he was assisting in the breach of fiduciary duty.

  • This was considered by Gibson J in the Baden v Société Generale: he suggested that...