Constructive Trusts - Irish Equity

Constructive Trusts

In cases of a fiduciary relationship

• Gabett v Lawlor

  • 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.

• Keech v Sandford

  • 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 infant.

  • Held that the renewal should be held on a constructive trust for the infant.

• Protheroe v Protheroe (CA)

  • 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.

• Moore v McGlynn (Ch D)

  • 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.

  • The brother applied for the office of postmaster upon the testator's death and received it.

  • 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.

• Attorney General for Hong Kong v Reid (PC)

  • The respondent accepted bribes while working for the government and used them to buy a number of properties in New Zealand.

  • The applicant argued that these were held on a constructive trust for the Crown.

  • Keech v Sandford applied

  • Held that, when a bribe is accepted by a fiduciary in breach of his duty, he holds that bribe on a constructive trust for the person to whom the duty was owed.

  • The fiduciary takes the risk of any losses incurred by investing such a bribe and has no right to retain any profits.

• Jones, 1994 Conveyancer

  • The idea that a fiduciary should be accountable to the beneficiary for the profits made from a bribe is sound in policy and principle, but may cause problems when it comes to the claims of creditors on an insolvent fiduciary.

  • Better solutions might be to make the fiduciary personally liable for the profits of the bribe or leave some judicial discretion in the application of the proprietary remedy (taking into account the justice of the case, the merit of the plaintiff's claim and the position of the defendant)

Agents

• 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 Phibbs (HL)

  • 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.

  • Using the knowledge they obtained in this capacity, they successfully attempted a takeover of the company, buying all the other shares and making profits personally and for the beneficiaries.

  • Lord Cohen:

    • The applicant received most of the information in the course of acting as the trustees' agents and created the opportunity to buy the shares by purporting to act on their behalf – therefore they now hold the shares on a constructive trust.

    • An agent is liable to account for profits he makes out of trust property if there is a possibility that there will be a conflict of interest – had the applicant been approached for the trustees for advice re the purchase of further shares during the negotiation of the transaction he would have been conflicted.

  • Lord Hodson:

    • Where a person holds a fiduciary position, he is accountable for all the profits made by reason of his position, the opportunities and knowledge he acquires therefrom to the person to whom he stands in the relationship, save where these are made with knowledge and assent of that person.

    • Positive wrongdoing is not necessary to impose such a constructive trust – even a remote possibility of a conflict of interest is enough.

  • Lord Guest (concurring)

  • Lord Upjohn (dissenting):

    • The formal rule of equity, that a person in a fiduciary capacity may not profit from his position, is part of the wider rule that a trustee must not place himself in a position where his duty and interest may conflict.

    • The test is whether there a reasonable man would think there is a real sensible possibility of conflict, not whether there is a conceivable possibility of conflict.

    • Information gained in the course of acting as a trustee may be used for the trustees benefit save where such use would be a breach of confidence or would put him in a position where his duty and interest would conflict.

    • In this case the appellants bought shares, which the trustees had no interest in buying, for themselves entirely at their own risk and did so with the knowledge and approval of the trustees.

  • Viscount Dilhorne (dissenting)

    • Where there has been impropriety on the part of a person in a fiduciary relationship, equity may hold that person to account for his profits.

    • As long as the trustees were opposed to buying shares, there was no possibility of the applicants' experiencing a conflict of interest.

    • Information gained while acting in a fiduciary capacity may be used for any purpose which is not within the scope of the fiduciary duties, without the user being held to account for the profits made – the question is A) whether the information could be used in relation to the trust concerned and if so, B) whether the use made was to the prejudice of the trust.

    • In this case the information was of no use to the trust and its use did not give rise to any conflict of interest.

Company Directors

• Regal Hastings v Gulliver (HL)

  • The respondents were former directors of Regal who had used their positions to acquire shares in a subsidiary and sell 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.

• Industrial Development Consultants v Cooley (Birmingham Assize)

  • The defendant, the managing director of a company which provided construction consultancy services, learnt during the course of negotiations with a gas board on its behalf, that although the board would enter to an agreement with the company but that it would consider awarding the contract to him personally.

  • He then secured a release from the company by falsely claiming ill health and then entered into a contract with the board on his own behalf.

  • Held that, liability will still be imposed where the company itself was not in a position to take on a contract secured by a director where he takes advantage of his fiduciary position to achieve this.

  • Thus the defendant was a constructive trustee of the benefit of the contract and liable to account for the profits derived from it.

  • If it were otherwise, the defendant will have made a large profit as a result of having deliberately put himself in a position where his duty to the plaintiffs and his personal interests conflicted.

• CMS Dolphin v Simonet (Ch)

  • The first named defendant who had been the director of an advertising agency resigned and set up a new business, recruiting all the agency's staff which resulted in its principal clients also switching their new business to his venture.

  • Held that, where a director who exploits after his resignation a maturing business opportunity, that opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties.

  • However, a director is not precluded from using his general fund of skill and knowledge and his personal connections.

Where there is no fiduciary relationship

Strangers

• Mara v Browne

  • Where somebody, not being a trustee and without authority from a trustee takes upon himself to intermeddle in a trust he will become a trustee of his own wrong (i.e. the voluntary assumption of trust duties followed by actions which amount to an abuse of trust will result in the stranger becoming a constructive trustee.)

• Royal Brunei Airlines v Tan Kok Ming (PC)

  • The defendant was the managing director and principal shareholder of a company which the plaintiffs appointed as their agent in a transaction for the sale of passenger and cargo transportation.

  • With the defendant's knowledge and assistance, the money was paid into the company's current account and used its own business purposes, resulting in its failing to pay the money to the airline before the due date.

  • The company became insolvent and the plaintiffs sued the defendant.

  • Held, that where a third party dishonestly assisted a trustee to commit a breach of trust or...