Constructive trusts in English law
Encyclopedia
Constructive trusts in English law are a form of trust
created by the courts primarily where the defendant has dealt with property in an "unconscionable manner", but also in other circumstances; the property will be held in "constructive trust" for the harmed party, obliging the defendant to look after it. The main categories of factors giving rise to a constructive trust are unconscionable dealings with property, profits from unlawful acts, and unauthorised profits by a fiduciary. Where the owner of property deals with it in a way as to deny or impede the rights of some other person over that property, the courts will order that owner to hold it in constructive trust. Where profits are made from unlawful acts, such as murder, fraud, or bribery, these profits will also be held in constructive trust. The most common of these is bribery, which requires that the person be in a fiduciary office. Certain offices, such as those of trustee and company director, are always fiduciary offices; the courts may choose to recognise others where the circumstances demand it. Where someone in a fiduciary office makes profits from their duties without the authorisation of that office's beneficiaries, a constructive trust may be imposed on those profits; there is a defence where the beneficiaries have authorised such profits. The justification here is that a person in such an office must avoid conflicts of interest, and be held to account should he fail to do so.
Other types of constructive trust not relating to unconscionable dealings are constructive trusts over property, mutual wills, and arguably secret trusts
. Where property is sold or transferred, the signing of an agreement to do so automatically transfers the equitable interest to the buyer or transferee; until the property itself is transferred, it is deemed to be held on constructive trust for the recipient. Mutual wills are irrevocable wills made by multiple people to come into force at the writer's death; similarly, these are also considered constructive trusts. Secret trusts are the subject of much debate over their classification, but one theory holds them to be constructive in nature. Related to constructive trusts are constructive trustees, or trustees de son tort
; these are where "one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee". Where their actions are reckless or dishonest, the court makes that person a constructive trustee, forcing them to account to the beneficiaries for any loss suffered and look after the trust property in their possession.
defined a constructive trust as a trust which "arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another". Essentially, a constructive trust will arise whenever an owner either ignores, or interferes, with the rights of another person with an interest in that property. There is a distinction between personal and proprietary rights to property. A constructive trust normally gives a proprietary right to the beneficiary that can be enforced on any other person. The alternative (a personal right) merely gives the beneficiary the right to recover money equivalent to the value of the property.
Constructive trusts, under Section 53(2) of the Law of Property Act 1925
, do not require any particular formalities on creation, unlike express trusts
. For them to be valid, however, the defendant (or "trustee" of the constructive trust) must know that he has dealt with property in an "unconscionable manner". In Westdeutsche Landesbank v Islington London Borough Council, Lord Browne-Wilkinson wrote that "Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience".
, constructive trusts may arise in one of three situations. First, when the parties form an agreement to buy the land, or show "common intention" by jointly contributing to the price or mortgage of a property, as in Lloyds Bank plc v Rosset. Second, when a contract to transfer rights is agreed to, the equitable interest is automatically transferred, something that also applies to personal property
. Third, a constructive trust may be created where there are several parties interested in commercially exploiting land, and some refrain from doing so due to an agreement with the defendant, as in Pallant v Morgan. In Banner Homes Group plc v Luff Development Ltd, it was decided that this principle applies even when no binding contract has been signed, and the claimant has refrained due to ongoing negotiations with the defendant.
Another "more contentious" form of constructive trust is in a situation where the claimant has "done everything necessary". Where the owner of property intends to transfer property to another, completes their side of the transfer and the transfer then fails, this property will be held on constructive trust as in Re Rose
. In relation to personal property, a constructive trust will be created over a fund created to protect pre-payments to a company in the event of that company going into insolvency. In several situations, companies, knowing they are in dire financial straits, have put money paid to them by customers for products not yet delivered in a separate bank account to protect it in the event of insolvency. This causes theoretical problems; it is "difficult to square the conscionability of holding the money on trust for the customers with the pari passu
principle in insolvency law that no unsecured creditor should be given an advantage over any other unsecured creditor".
or an established legal principle, equity puts any property acquired through these acts into a constructive trust. The most common type of trust here is one resulting from bribery; where somebody in a fiduciary office makes unlawful profit, that money will be held on constructive trust for the beneficiaries of his office. In Attorney General for Hong Kong v Reid, the Director of Public Prosecutions in Hong Kong accepted bribes to not prosecute certain people. The court held that this was a violation of fiduciary duty, and put the money on constructive trust. An issue with this principle is that the position of Director of Public Prosecutions is not normally understood to be a fiduciary one. Rather, the courts are using fiduciary duties as a method of punishing the defendant; Alastair Hudson
writes that they are "as concerned to punish the wrongdoer as to protect rights in property".
Whether or not someone is a fiduciary depends on their position. Trustees, company directors, agents and business partners are all fiduciaries, as in Yugraneft v Abramovich, but other positions may be recognised by the court if the misuse of powers in a particular circumstance renders them so, as in the Attorney General case. In Brinks v Abu-Saleh (No. 3), a security guard who was bribed to give information on a company's security systems, allowing a gang of armed robbers to burgle their warehouse, was found to be in a fiduciary position. While a security guard would not normally be a fiduciary due to not holding a senior enough role, in relation to security arrangements the guard would be found to be acting in a fiduciary capacity. Bribes may also be synonymous with "secret commissions", where somebody is given an undisclosed "kickback".
Murder will make the killer a constructive trustee of whatever property they acquire as a result. This applies to murder, as in In the Estate of Crippen, inciting someone to murder, as in Evans v Evans, and causing death by reckless driving, as in R v Seymour (Edward). In Re K (deceased), it was confirmed that involuntary manslaughter will not require constructive trusts, and neither will situations where there is a successful plea of insanity
, as in found in Section 1 of the Criminal Procedure (Insanity) Act 1964. Curiously, there is no requirement that the defendant be found guilty in criminal proceedings; in Re Sigsworth, it was decided that claims can be brought without criminal proceedings having taken place providing the defendant is held up to the criminal standards of guilt in the equity case.
In cases of fraud, the same principle applies; the property is held by the fraudster on constructive trust for the original owner, unless the original owner was involved in the fraud, as in Lonrho plc v Fayed (No. 2). An exception to this principle is fraudulent misrepresentation, where the courts disagree over whether it immediately forms a constructive trust or requires action by the victim. In Collings v Lee, an estate agent transferred property to a non-existent purchaser (in reality an alias) and then claimed that as he was not the transferee, he did not have to pay the vendors; it was held that this fraudulent misrepresentation meant he held the property on constructive trust. However, in Lonrho plc, Millett J held that "A contract obtained by fraudulent misrepresentation is voidable, not void, even in equity. The representee may elect to avoid it, but until he does so, the representor is not a constructive trustee of the property transferred pursuant to the contact, and no fiduciary relationship exists between him and the representee".
The questions then are fourfold; what is the justification for such a constructive trust, how can authorisation be acquired, who does the fiduciary owe duties to, and what are the remedies for unauthorised profit-making. The main case on this is Boardman v Phipps, where the House of Lords
espoused two possible justifications. The first one is that it is a strict rule that a fiduciary cannot allow for a conflict of interest. As such, if a fiduciary does do so, he will be required to account to the beneficiaries of his office, regardless of whether or not he is acting in bad faith. The second justification is one given by Lords Hodson and Guest in Boardman. The case concerned the use of confidential information by a trustee for the trustee's personal gain. Hodson and Guest held that where such a situation arises, the constructive trust is justified not only to avoid conflicts of interest but also because such information is trust property, and using it for personal gain is misuse.
There is no requirement that the profit be directly made from the fiduciary position, merely in a way that causes a conflict between the fiduciary's personal interests and his duties. If a trustee was informed by the trust's stockbroker that only one parcel of highly sought-after stocks remained and chose to purchase it for himself rather than for the trust, he would be taking advantage of the trust and causing a conflict of interest. On the second issue, Boardman confirmed a defence of authorisation; if the fiduciary has informed the beneficiaries that he is and will be acting on his own behalf, and received permission to do so, the property would not have been held on constructive trust. The third issue is who does the fiduciary owe duties to. In Boardman the case was concerning a trust, and it was held that the duties were towards the beneficiaries. Section 170 of the Companies Act 2006
provides that in situations concerning companies, the duties of the directors and other fiduciaries are to that company.
Where a fiduciary has made unauthorised profits, the remedy is for those profits to hold the property on constructive trust. If that profit is no longer available, the fiduciary is "liable to account" to the beneficiaries. The question is what is meant by "liable to account". In Sinclair Investment Holdings SA v Versailles Trade Finance (No. 3), Rimer J explained that this meant the beneficiaries acquire rights over those profits, and the trustee must pay that money or the money's worth back to the beneficiaries. If the profits are mixed with other money or used to purchase property, the beneficiary may trace
that property and claim it.
; this second form is similar to one form of resulting trust Common intention trusts grant a claimant an equitable right to the home, calculated as a proportion of the total value that corresponds to their financial contributions. The second occasion on which a constructive trust may arise over property is where a piece of property is sold or transferred. The contract transfers the equitable interest from the original owner to the other party, which takes place through a constructive trust. This originated with Chinn v Collins, where it was decided that the creation of such a contract automatically passes the equitable interest to the buyer, assuming the contract can be completed. Until it is completed, that property is held on constructive trust by the seller for the benefit of the buyer. This applies to both personal
and real property
, with additional rules for the transfer of real property (land). Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989
provides that the contract must be in writing, which is not a requirement for the transfer of personal property.
Secret trusts
are sometimes considered constructive trusts. They do not follow the Wills Act 1837
; a requirement for express trusts. The argument is that it is such trusts are intended to prevent fraud by statute. Under this rule, secret trusts would be constructive trusts; the reason they do not have to follow the Wills Act is because they are created by the courts. This is a difficult argument with which to justify half-secret trusts, because since the will mentions the trust, fraud is not directly possible. A more modern argument is that secret trusts are independent and operate outside the will. The trust was created by the donor and trustee during the donor's life, and simply not constituted until his death; it does not have to follow the Wills Act, because it was not created by a will. This view was expressed by Megarry VC
in Re Snowden, where he said "The whole basis of secret trusts...is that they operate outside the will, changing nothing that is written in it, and allowing it to operate according to its tenor, but then fastening a trust on to the property in the hands of the recipient". This suggests that secret trusts are not constructive trusts but rather express trusts.
. In Mara v Browne, Smith LJ stated that "if one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee, he may therefore make himself what is called in law trustee of his own wrong - ie, a trustee de son tort, or, as it is also termed, a constructive trustee". For someone to be made a constructive trustee, they must have had the property in their possession or control before the application, and have acted in a dishonest or reckless way. If found liable, the constructive trust will be held to account personally to repay any loss suffered by the trust fund, and will be responsible for maintaining that trust property in his possession.
English trusts law
English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person gives assets English trusts law is the original and foundational law of trusts in the...
created by the courts primarily where the defendant has dealt with property in an "unconscionable manner", but also in other circumstances; the property will be held in "constructive trust" for the harmed party, obliging the defendant to look after it. The main categories of factors giving rise to a constructive trust are unconscionable dealings with property, profits from unlawful acts, and unauthorised profits by a fiduciary. Where the owner of property deals with it in a way as to deny or impede the rights of some other person over that property, the courts will order that owner to hold it in constructive trust. Where profits are made from unlawful acts, such as murder, fraud, or bribery, these profits will also be held in constructive trust. The most common of these is bribery, which requires that the person be in a fiduciary office. Certain offices, such as those of trustee and company director, are always fiduciary offices; the courts may choose to recognise others where the circumstances demand it. Where someone in a fiduciary office makes profits from their duties without the authorisation of that office's beneficiaries, a constructive trust may be imposed on those profits; there is a defence where the beneficiaries have authorised such profits. The justification here is that a person in such an office must avoid conflicts of interest, and be held to account should he fail to do so.
Other types of constructive trust not relating to unconscionable dealings are constructive trusts over property, mutual wills, and arguably secret trusts
Secret trusts in English law
Secret trusts in English law are a class of trust defined as an unofficial arrangement between a testator and a trustee, made to come into force after death, that aims to benefit a person without having been written in a will. Normally, the property would be given to the trustee in the will, and he...
. Where property is sold or transferred, the signing of an agreement to do so automatically transfers the equitable interest to the buyer or transferee; until the property itself is transferred, it is deemed to be held on constructive trust for the recipient. Mutual wills are irrevocable wills made by multiple people to come into force at the writer's death; similarly, these are also considered constructive trusts. Secret trusts are the subject of much debate over their classification, but one theory holds them to be constructive in nature. Related to constructive trusts are constructive trustees, or trustees de son tort
Trustee de son tort
A trustee de son tort is a person who may be regarded as owing fiduciary duties by a course of conduct that amounts to a wrong, or a tort. Accordingly, a trustee de son tort is not a person who is formally appointed as a trustee, but one who assumes such a role, and then cannot be heard to argue...
; these are where "one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee". Where their actions are reckless or dishonest, the court makes that person a constructive trustee, forcing them to account to the beneficiaries for any loss suffered and look after the trust property in their possession.
Definition
A constructive trust is a trust which is imposed by the courts whenever the defendant knows that he has dealt with property in an "unconscionable manner", such as stealing it, possessing it via fraud, and accepting a bribe while in occupation of a fiduciary office. The constructive trust is intended to take the property from the defendant's control, preventing them from causing additional harm with it. It thus acts regardless of the parties' intentions. In Paragon Finance plc v DB Thakerar & Co, Millet LJPeter Millett, Baron Millett
Peter Julian Millett, Baron Millett, PC, QC is a British former judge and barrister.The son of Denis and Adele Millett was educated at Harrow School, London and Trinity Hall, Cambridge, where he received a Master of Arts in classics and law in 1954. From 1955 to 1957, he served as Flying Officer...
defined a constructive trust as a trust which "arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another". Essentially, a constructive trust will arise whenever an owner either ignores, or interferes, with the rights of another person with an interest in that property. There is a distinction between personal and proprietary rights to property. A constructive trust normally gives a proprietary right to the beneficiary that can be enforced on any other person. The alternative (a personal right) merely gives the beneficiary the right to recover money equivalent to the value of the property.
Constructive trusts, under Section 53(2) of the Law of Property Act 1925
Law of Property Act 1925
The Law of Property Act 1925 is a statute of the United Kingdom Parliament. It forms part of an interrelated programme of legisation introduced by Lord Chancellor Lord Birkenhead between 1922 and 1925. The programme was intended to modernise the English law of real property...
, do not require any particular formalities on creation, unlike express trusts
Creation of express trusts in English law
The creation of express trusts in English law must involve four elements for the trust to be valid: capacity, certainty, constitution and formality. Capacity refers to the settlor's ability to create a trust in the first place; generally speaking, anyone capable of holding property can create a trust...
. For them to be valid, however, the defendant (or "trustee" of the constructive trust) must know that he has dealt with property in an "unconscionable manner". In Westdeutsche Landesbank v Islington London Borough Council, Lord Browne-Wilkinson wrote that "Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience".
Unconscionable dealings with property
When the owner of property deals with it in such a way as to deny or impede the rights of some other person over that property, the courts will order that owner to hold it on constructive trust. For trusts of real propertyReal property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
, constructive trusts may arise in one of three situations. First, when the parties form an agreement to buy the land, or show "common intention" by jointly contributing to the price or mortgage of a property, as in Lloyds Bank plc v Rosset. Second, when a contract to transfer rights is agreed to, the equitable interest is automatically transferred, something that also applies to personal property
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
. Third, a constructive trust may be created where there are several parties interested in commercially exploiting land, and some refrain from doing so due to an agreement with the defendant, as in Pallant v Morgan. In Banner Homes Group plc v Luff Development Ltd, it was decided that this principle applies even when no binding contract has been signed, and the claimant has refrained due to ongoing negotiations with the defendant.
Another "more contentious" form of constructive trust is in a situation where the claimant has "done everything necessary". Where the owner of property intends to transfer property to another, completes their side of the transfer and the transfer then fails, this property will be held on constructive trust as in Re Rose
Re Rose
Re Rose [1952] Ch 499 is a case in English trusts law and English property law. It established that if a donor has done everything that can be expected of him to transfer legal title , but the transfer is delayed by the routine operation of the law then the gift is still effective...
. In relation to personal property, a constructive trust will be created over a fund created to protect pre-payments to a company in the event of that company going into insolvency. In several situations, companies, knowing they are in dire financial straits, have put money paid to them by customers for products not yet delivered in a separate bank account to protect it in the event of insolvency. This causes theoretical problems; it is "difficult to square the conscionability of holding the money on trust for the customers with the pari passu
Pari passu
Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."...
principle in insolvency law that no unsecured creditor should be given an advantage over any other unsecured creditor".
Profits from unlawful acts
Where acts lead to profit and are illegal, under either English criminal lawEnglish criminal law
English criminal law refers to the body of law in the jurisdiction of England and Wales which deals with crimes and their consequences. Criminal acts are considered offences against the whole of a community...
or an established legal principle, equity puts any property acquired through these acts into a constructive trust. The most common type of trust here is one resulting from bribery; where somebody in a fiduciary office makes unlawful profit, that money will be held on constructive trust for the beneficiaries of his office. In Attorney General for Hong Kong v Reid, the Director of Public Prosecutions in Hong Kong accepted bribes to not prosecute certain people. The court held that this was a violation of fiduciary duty, and put the money on constructive trust. An issue with this principle is that the position of Director of Public Prosecutions is not normally understood to be a fiduciary one. Rather, the courts are using fiduciary duties as a method of punishing the defendant; Alastair Hudson
Alastair Hudson
Alastair Hudson is an English barrister and legal academic. He is a National Teaching Fellow, a Fellow of the Higher Education Academy, and a Fellow of the Royal Society of Arts...
writes that they are "as concerned to punish the wrongdoer as to protect rights in property".
Whether or not someone is a fiduciary depends on their position. Trustees, company directors, agents and business partners are all fiduciaries, as in Yugraneft v Abramovich, but other positions may be recognised by the court if the misuse of powers in a particular circumstance renders them so, as in the Attorney General case. In Brinks v Abu-Saleh (No. 3), a security guard who was bribed to give information on a company's security systems, allowing a gang of armed robbers to burgle their warehouse, was found to be in a fiduciary position. While a security guard would not normally be a fiduciary due to not holding a senior enough role, in relation to security arrangements the guard would be found to be acting in a fiduciary capacity. Bribes may also be synonymous with "secret commissions", where somebody is given an undisclosed "kickback".
Murder will make the killer a constructive trustee of whatever property they acquire as a result. This applies to murder, as in In the Estate of Crippen, inciting someone to murder, as in Evans v Evans, and causing death by reckless driving, as in R v Seymour (Edward). In Re K (deceased), it was confirmed that involuntary manslaughter will not require constructive trusts, and neither will situations where there is a successful plea of insanity
Insanity in English law
Insanity in English law is a defence to criminal charges based on the idea that the defendant was unable to understand what he was doing, or, that he was unable to understand that what he was doing was wrong....
, as in found in Section 1 of the Criminal Procedure (Insanity) Act 1964. Curiously, there is no requirement that the defendant be found guilty in criminal proceedings; in Re Sigsworth, it was decided that claims can be brought without criminal proceedings having taken place providing the defendant is held up to the criminal standards of guilt in the equity case.
In cases of fraud, the same principle applies; the property is held by the fraudster on constructive trust for the original owner, unless the original owner was involved in the fraud, as in Lonrho plc v Fayed (No. 2). An exception to this principle is fraudulent misrepresentation, where the courts disagree over whether it immediately forms a constructive trust or requires action by the victim. In Collings v Lee, an estate agent transferred property to a non-existent purchaser (in reality an alias) and then claimed that as he was not the transferee, he did not have to pay the vendors; it was held that this fraudulent misrepresentation meant he held the property on constructive trust. However, in Lonrho plc, Millett J held that "A contract obtained by fraudulent misrepresentation is voidable, not void, even in equity. The representee may elect to avoid it, but until he does so, the representor is not a constructive trustee of the property transferred pursuant to the contact, and no fiduciary relationship exists between him and the representee".
Fiduciary making unauthorised profits
Where a person in a fiduciary office earns unauthorised profits as a result of their position, this money will be held on constructive trust. This principle originated with Keech v Sandford, and the rule was first fully defined in Bray v Ford, where Lord Herschell said that:The questions then are fourfold; what is the justification for such a constructive trust, how can authorisation be acquired, who does the fiduciary owe duties to, and what are the remedies for unauthorised profit-making. The main case on this is Boardman v Phipps, where the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
espoused two possible justifications. The first one is that it is a strict rule that a fiduciary cannot allow for a conflict of interest. As such, if a fiduciary does do so, he will be required to account to the beneficiaries of his office, regardless of whether or not he is acting in bad faith. The second justification is one given by Lords Hodson and Guest in Boardman. The case concerned the use of confidential information by a trustee for the trustee's personal gain. Hodson and Guest held that where such a situation arises, the constructive trust is justified not only to avoid conflicts of interest but also because such information is trust property, and using it for personal gain is misuse.
There is no requirement that the profit be directly made from the fiduciary position, merely in a way that causes a conflict between the fiduciary's personal interests and his duties. If a trustee was informed by the trust's stockbroker that only one parcel of highly sought-after stocks remained and chose to purchase it for himself rather than for the trust, he would be taking advantage of the trust and causing a conflict of interest. On the second issue, Boardman confirmed a defence of authorisation; if the fiduciary has informed the beneficiaries that he is and will be acting on his own behalf, and received permission to do so, the property would not have been held on constructive trust. The third issue is who does the fiduciary owe duties to. In Boardman the case was concerning a trust, and it was held that the duties were towards the beneficiaries. Section 170 of the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
provides that in situations concerning companies, the duties of the directors and other fiduciaries are to that company.
Where a fiduciary has made unauthorised profits, the remedy is for those profits to hold the property on constructive trust. If that profit is no longer available, the fiduciary is "liable to account" to the beneficiaries. The question is what is meant by "liable to account". In Sinclair Investment Holdings SA v Versailles Trade Finance (No. 3), Rimer J explained that this meant the beneficiaries acquire rights over those profits, and the trustee must pay that money or the money's worth back to the beneficiaries. If the profits are mixed with other money or used to purchase property, the beneficiary may trace
Tracing in English law
Tracing in English law is a procedure to identify property that has been taken from the claimant involuntarily. It is not in itself a way to recover the property, but rather to identify it so that the courts can decide what remedy to apply...
that property and claim it.
Constructive trusts relating to property
Many constructive trusts relate the transfer of property. Those trusts over homes are known as trusts of common intention, and relate exclusively to family homes. In Lloyds Bank v Rosset, the House of Lords set out the circumstances in which a trust of common intention can arise. Firstly, where the parties demonstrate that there was an agreement formed before the acquisition of the property. Secondly, where the parties contribute to the purchase price or mortgage payments and therefore practically demonstrate a common intention to claim an equitable interestEquitable interest
An equitable interest is an "interest held by virtue of an equitable title or claimed on equitable grounds, such as the interest held by a trust beneficiary." The equitable interest is a right in equity that, if violated , is subject to satisfaction...
; this second form is similar to one form of resulting trust Common intention trusts grant a claimant an equitable right to the home, calculated as a proportion of the total value that corresponds to their financial contributions. The second occasion on which a constructive trust may arise over property is where a piece of property is sold or transferred. The contract transfers the equitable interest from the original owner to the other party, which takes place through a constructive trust. This originated with Chinn v Collins, where it was decided that the creation of such a contract automatically passes the equitable interest to the buyer, assuming the contract can be completed. Until it is completed, that property is held on constructive trust by the seller for the benefit of the buyer. This applies to both personal
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
and real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
, with additional rules for the transfer of real property (land). Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989
Law of Property (Miscellaneous Provisions) Act 1989
The Law of Property Act 1989 is a United Kingdom Act of Parliament, which lays down a number of important provisions for English property law....
provides that the contract must be in writing, which is not a requirement for the transfer of personal property.
Other
Constructive trusts also arise with mutual wills; wills created by two or more people at the same time, with the intention that the wills are completely binding. Normal wills can be altered or revoked; when one signatory to a mutual will dies, the will irrevocably binds the other signatories. This is dependant on several things. Firstly, there must be evidence of a contract between the signatories demonstrating that each would make a will in a certain form, and neither would revoke it, as in Olins v Walters. Secondly, the will must make it clear that it is to apply to the other party after death. Until a death occurs, the arrangement is simply a contract and has no effect in equity.Secret trusts
Secret trusts in English law
Secret trusts in English law are a class of trust defined as an unofficial arrangement between a testator and a trustee, made to come into force after death, that aims to benefit a person without having been written in a will. Normally, the property would be given to the trustee in the will, and he...
are sometimes considered constructive trusts. They do not follow the Wills Act 1837
Wills Act 1837
The Wills Act 1837 is an Act of the Parliament of the United Kingdom that confirms the power of every adult to dispose of their real and personal property, whether they are the outright owner or a beneficiary under a trust, by will on their death...
; a requirement for express trusts. The argument is that it is such trusts are intended to prevent fraud by statute. Under this rule, secret trusts would be constructive trusts; the reason they do not have to follow the Wills Act is because they are created by the courts. This is a difficult argument with which to justify half-secret trusts, because since the will mentions the trust, fraud is not directly possible. A more modern argument is that secret trusts are independent and operate outside the will. The trust was created by the donor and trustee during the donor's life, and simply not constituted until his death; it does not have to follow the Wills Act, because it was not created by a will. This view was expressed by Megarry VC
Robert Megarry
Sir Robert Edgar Megarry FBA PC QC was a British lawyer and judge.Originally a solicitor, he requalified as a barrister and also pursued a parallel career as a legal academic. He later became a High Court judge and served as Vice-Chancellor of the Chancery Division from 1976 to 1981...
in Re Snowden, where he said "The whole basis of secret trusts...is that they operate outside the will, changing nothing that is written in it, and allowing it to operate according to its tenor, but then fastening a trust on to the property in the hands of the recipient". This suggests that secret trusts are not constructive trusts but rather express trusts.
Constructive trustees
When non-trustees interfere with the workings of an express trust to such an extent as to harm it, they can be deemed to be "constructive trustees", or trustees de son tortTrustee de son tort
A trustee de son tort is a person who may be regarded as owing fiduciary duties by a course of conduct that amounts to a wrong, or a tort. Accordingly, a trustee de son tort is not a person who is formally appointed as a trustee, but one who assumes such a role, and then cannot be heard to argue...
. In Mara v Browne, Smith LJ stated that "if one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee, he may therefore make himself what is called in law trustee of his own wrong - ie, a trustee de son tort, or, as it is also termed, a constructive trustee". For someone to be made a constructive trustee, they must have had the property in their possession or control before the application, and have acted in a dishonest or reckless way. If found liable, the constructive trust will be held to account personally to repay any loss suffered by the trust fund, and will be responsible for maintaining that trust property in his possession.