Constructive Trusts Flashcards
Constructive Trusts
In what circumstances do constructive trusts arise?
CT arises (a) by operation of law (b) irrespective of the parties’ intentions + (c) in circs where it’d be unjust for party holding legal title to or possession of property to (continue to) enjoy the benefit of it
Constructive Trusts - Agents and Unauthorized Profits
Gabbett v Lawder [1883]:
An agent has a fiduciary position and is obliged to put his principal’s interests before his
Man in fiduciary position who gets an unauth profit holds it on CT for beneficiary
Constructive Trusts - Contracts for the Sale of Land
Describe this area?
Courts have held a vendor of land becomes a constructive trustee for
buyer pending completion of sale (s.52 LCLRA 2009)
Constructive Trusts - Mutual Wills
Describe this area?
X + Y agree on the death of 1st, all his prop pass to survivor + on death of 2nd, prop pass to a 3rd party (CT)
Re Oldham [1925]: Must have entered a binding agreement that the survivor won’t revoke his will.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger
Barnes v Addy [1874]
Stranger: someone other than the agent + principal i.e. A 3rd party stranger to the fiduciary relationship.
- HOL identified two ways a 3rd party may be liable to acc to a principal for the agent’s conduct:
(a) Knowing Receipt: If they receive and become chargeable with some part of the trust property
(b) Dishonest assistance: If they help knowingly in a dishonest + fraudulent design on part of trustees
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger
Describe “Knowing Receipt” in this context?
Y was a trustee. Z was the beneficiary. In breach of trust, Y transferred the trust property to A.
If A was a bona fide purchaser for value w/o notice of Y’s breach, Z can’t recover (Equity’s darling)
If A knew of Y’s breach of trust, A holds the property on a constructive trust for Z
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required
Bank of Credit and Commerce International v Akindele [2001]
Does A have to have actual notice or is constructive notice sufficient?
- D entered agreement w I Ltd, a comp owned by B, to buy shares in B’s holding company. The agreement guaranteed D a return of 15% p/a on investment of $10mn.
- D unaware the agreement was part of a fraudulent scheme by officers of B to enable the holding co buy its own shares. Under it, P paid D $17mn. P’s liquidator argued D held this on CT for P.
- Rejected: Held for D. Held there should be a single test of knowledge for recipient liability: the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.
- Applying it here, held although D may have had suspicions as to the integrity of BCCI at one point his state of knowledge wasn’t such as to make it unconscionable for him to retain the money.
Criticism: ‘unconsc test vague: depends if D got the prop unconscientiously or not rather than his knowledge.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required
Re Frederick’s Inns [1994] Irish courts don’t follow Akindele – knowledge based test
- SC appeared to accept constructive notice would be sufficient to ground liability.
- Directors of a group of cos that were insolvent sold assets of some of the cos and paid Revenue not only the sums owed by the co in question but also owed by other cos in the group.
- Liquidator argued payments for other cos ultra vires as they removed assets from them after they insolvent
- SC held the directors had breached their fiduciary duties. Held Revenue had constructive notice that they’d been obtained in breach of duty bc the memorandum’s of the cos showed the lack of capacity and the memorandums were public documents. Little consideration given to the degree of knowledge here.
Delany (2011) says this imposes an unnecessarily high onus on people/bodies dealing with a co.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required
Ulster Factors Ltd v Entoglen [1997]
- HC held actual or constructive knowledge of a breach of trust renders a recipient liable. Here, D had no
actual knowledge + there was no obligation to inquire. SO constructive knowledge couldn’t be imputed.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Knowing Receipt - The Degree of Knowledge Required
Harlequin Property v O’Halloran [2013]
- McGovern J noted the UK test of unconscionability is a much lower threshold than in Ireland + refused to
adopt it. D2 (D1’s old dad) escaped liability as MJ felt he was unwittingly dragged into the case by his son
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance
Describe dishonest assistance?
Y was a trustee. Z was the beneficiary. In breach of trust, Y took money from the trust fund and use it to buy a house for himself. H was assisted in this breach by A.
A (who assisted in breach of fiduciary duty) may be personally liable to the principal i.e. may be ordered to pay damages to the principal.
He is personally liable however he is not a constructive trustee of any property.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Must it be proved that the Agent acted dishonestly?
Royal Brunei Airlines v Tan [1995]
- P appointed a comp its agent. Agent received the money paid on the purchase of tickets for travel w P in trust for P. D was the agent’s managing director + main shareholder.
- D paid the money so received in discharge of the agent’s trade debts owed to 3rd parties.
- Agent became insolvent and P sought relief against D. P’s claim succeeded on basis of D’s dishonest assistance in breach of trust by the agent.
- Held you don’t have to prove the trustee acted dishonestly in breaching the trust.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - What is the degree of fault which A must possess to be personally liable to the principal[al?
Baden v Societe Generale [1993]
Traditionally, it had to be proved A knew he was assisting in breach of a fiduciary duty
- Held it means (i) actual knowledge (ii) wilfully shitting eyes to the obvious (iii) wilfully + recklessly failing to make such inquiries as honest reasonable man would (iv) knowledge of circs that’d indicate the
facts to an honest reasonable man or (v) knowledge of circs that’d put honest reasonable man on inquiry
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - What is the degree of fault which A must possess to be personally liable to the principal[al?
Royal Brunei Airlines v Tan [1995]
- Nicholls L abandoned these^ 5 categories and rejected negligence + unconscionability as bases of liability
- Held dishonesty should be the touchstone of liability.
Constructive Trusts - Knowing Receipt and Dishonest Assistance by a Stranger - Dishonest Assistance - Is the test for dishonesty subjective or objective?
Royal Brunei Airlines v Tan [1995] Objective
- Nicholls L identified dishonesty as synonymous w a want of probity + commercially unacceptable conduct
- Confusion: Did he intend the test for dishonesty be subjective or objective?
- Held acting dishonestly means not acting as an honest person would in circs: this is an objective standard
- Then he stated when deciding if a person acted honestly, court must look at all the circs known to the 3rd party at the time + consider his personal attributes such as his experience + intelligence