Head 25: Constructive Trusts

Question 1

What is a constructive trust?

Answer 1

This is a trust which arises by operation of law in certain circumstances. It is very common in England but not common (and academically controversial) in Scotland.

Question 2

When do constructive trusts arise in Scotland?

Answer 2

There is general agreement that constructive trusts do arise in two specific circumstances in Scotland:

⁃ (a) Where a party standing in a pre-existing fiduciary relationship to another party (eg trustees, agent, ) comes to hold the property of that person.

⁃ (b) where a third party[ They can either be donees or acquirers in bad faith.] either gratuitously or with knowledge of the breach of trust acquires property belonging to the trust,
⁃ NB bad faith acquirers get good title under the 1961 Act and thus the transaction cannot be challenged. Donees are not protected by the 1961 Act.

See Diagrams!*

Question 3

Jopp v Johnston’s Trs (1904)

Answer 3

⁃ Mr Johnston was Mrs Jopp’s law agent and held power of attorney in relation to her financial affairs. He incashed one of her investments and put the proceeds with some of his own money into an account in his own name. He spent part of it then became insolvent.
⁃ It was held that the remaining part did not fall into insolvency - it was not part of the insolvent estate because Mr Johnston was a trustee of the money.
⁃ [Although this is normally cited as a constructive trust case the court does not talk about constructive trusts at all. It is probably thought about as an implied trust.]

Question 4

*Sutnam International Inc v Herbage 1991

Answer 4

⁃ Mr and Mrs Herbage were respectively a director and secretary of Sutnam. They removed money from the company and sent it to their lawyer who bought property in Scotland with it in their own names. Mr Herbage became insolvent but his wife didn’t.
⁃ The other shareholders of Sutnam tried to get the property back and argued that Mr Herbage was a constructive trustee because there is a fiduciary relationship between Mr Herbage as director to Sutnam.
⁃ The court held that a relevant case had been pled but they would have to hear the evidence before they gave decree because Mr and Mrs Herbage argued that the company owed them money anyway.

Question 5

Mortgage Corporation v Mitchells Robertson 1997

Answer 5

Mortgage corporation lent money to acquire heritable property to a borrower who was to have granted a standard security over it. The mortgage corporation sent money to their lawyer’s and told them not to hand it over until they received the security. But their lawyers blundered and handed the money over to the borrower’s lawyers who gave it to the borrower without receiving the security.

The security was never received and the borrower defaulted so the mortgage corporation suffered a huge loss and sued their lawyers in contract and delict and sued the borrower's lawyers in delict[ Because they ought to have known that they shouldn't have handed over the cheque without the security.] and for breach of constructive trust.
The case did not give a final answer but the claim based on breach of constructive trust was not dismissed.

[[[The argument on this basis was that when the mortgage corporation handed money over to their lawyers there was a trust implied. The borrower's lawyers were a gratuitous third party since they gave nothing in exchange and they should have known about it being in breach of trust. Thus they were constructive trustees of the money and thus the money could be got back from the borrower's lawyers (even though it had been handed over to the borrower).]]]

Question 6

Why are constructive trust claims useful in cases of insolvency?

Answer 6

Claims based on contract, delict or U/E in these circumstances are not much use against an insolvent because they are all personal remedies - they don’t give any element of priority or security at all. But if you can raise the action on the basis of constructive trust then you may be more successful.