Constructive trusts can arise in a number of different ways

8.4.1.1 Trustees’ or fiduciary’s unauthorised profits usually resulting from a conflict of interest

s Boardman v Phipps (1967); see Chapter 9.

8.4.1.2 Breach of trust or fiduciary duty leading to unauthorised profits or purchase of identifiable property with the trust money

s Foskett v McKeown (2001); see Chapter 14.

8.4.1.3 Misuse of confidential information by the fiduciary

s See Boardman v Phipps (1967) above.

8.4.1.4 Where the fiduciary accepts bribes:

s There are serious questions as to the status of the bribe.

s If the bribe is held on constructive trust for the beneficiary then

s any property purchased with the bribe money belongs to the benefi-ciary to the exclusion of other creditors;

s the beneficiary receives a ‘windfall’ without any loss.

s Alternatively if the remedy is only personal in nature then the benefi-ciary has to take his place ‘in the queue’ alongside other creditors.

s In Lister v Stubbs (1890) the Court of Appeal held that where a fidu-ciary takes a bribe the remedy is personal only for restitution of the bribe; hence any profit made by the fiduciary from the bribe belongs to the fiduciary.

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Workpoint

Does this mean that a dishonest fiduciary who accepts a bribe is in a better position than an honest bona fide fiduciary who makes a secret profit? (Boardman v Phipps (1967).) How does this principle equate with the prevention of unjust enrichment?

s The matter came before the Privy Council in Attorney- General for Hong Kong v Reid (1994).

Case:

The defendant being a public prosecutor in Hong Kong took bribes to delay or obstruct prosecutions amounting to approximately HK$12 million. He purchased three freehold properties in New Zealand for about NZ$500,000 with part of the money. The properties were targeted by the Hong Kong Government for recovery of at least part of the HK$12 million, stating they were held on constructive trust for the Government.

The defendants opposed this on the grounds that the Crown had no equitable interest in the three New Zealand properties.

Held

The Privy Council (main judgment delivered by Lord Templeman) ruled that the three properties so far as they represent bribes accepted by Mr Reid are held in trust for the Crown.

Is this decision correct? Consider the following:

s Should the claimant get priority over other creditors?

s If the bribe has increased in value then the beneficiary gets a

‘windfall’ – even though no loss to him has been made.

s Should an alternative be to balance the interests of creditors and the beneficiary by imposing only personal liability for an increase in value? Some have referred to the decision as ‘proprietary overkill’ – see Peter Birks, An Introduction to the law of Restitution, rev. ed.

(Clarendon Press, 1989), p. isions follow Lister v Stubbs or Reid?

s Should later decisions follow Lister v Stubbs or Reid?

Reflection Point

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In a recent case the Court of Appeal had an opportunity to reconsider the Reid case.

A director fraudulently increased the value of his own shareholding, making a secret profit of about £30 million. The director had not acquired the shares from company funds;

however, the profit derived from his breach of fiduciary duty to the company.

The question was whether the director held the profit on constructive trust for the company or whether he was only personally liable and hence other creditors could claim a share.

Held

The Court of Appeal followed its own decision in Lister v Stubbs and declined to follow Attorney- General for Hong Kong v Reid. Therefore the liability was only personal in nature and no constructive trust was imposed.

Several reasons were given by the Court of Appeal but two appear to stand out:

s Five decisions of the Court of Appeal spread over almost 100 years, all of which follow the reasoning in Lister v Stubbs, and a House of Lords case, Tyrell v Bank of London (1862), which likewise followed the same reasoning as Lister v Stubbs.

s The Court of Appeal in Sinclair distinguished between

s where a fiduciary is unjustly enriched by depriving the beneficiary of an asset (proprietary claim); and

s where he enriches himself by doing a wrong to the beneficiary (as with taking a bribe) (personal claim only).

So the law since Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) (2011) CA is as follows:

s A beneficiary cannot claim a proprietary interest unless

s the asset was beneficially owned by the beneficiary; or

s the fiduciary acquired the asset by taking advantage of an opportunity which was properly that of the beneficiary (as in Boardman v Phipps (1967)).

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s If not the remedy is not proprietary but personal – an equitable account of the property received in breach of fiduciary duty; the beneficiary must therefore take his place alongside other unsecured creditors.

s However it is still unclear the extent to which this principle applies where the asset increases in value. If the remedy is personal then, generally, increases in value cannot be taken into account.

8.4.1.5 In the family home, either

s an express common intention by the parties that the beneficial interest is shared, followed by some detrimental reliance on that intention by the party either claiming an interest or disputing the quantum; or s an inferred common intention that the beneficial interests are shared

based on the conduct of the parties;

s there is some judicial disagreement as to the threshold of conduct required for the inferred common intention constructive trust.

s The House of Lords in Lloyds Bank v Rosset (1991) per Lord Bridge felt that only a contribution to the purchase price or payment of the mortgage instalments would suffice and ‘nothing less will do’.

s However, obiter comments in Jones v Kernott (2011) and Stack v Dowden (2007) suggest that this threshold is too high and that indirect payments should count.

s The Privy Council in Abbott v Abbott (2007) regarded indirect pay-ments as evidence of an inferred common intention.

Constructive trust of the family home

Express common intention plus Detrimental reliance

Inferred common intention (Conduct required which

meets or exceeds minimum threshold)

8.4.1.6 Where a trustee takes the renewal of a lease in his personal capacity that was previously held by him on trust

s Keech v Sandford (1726) (see Chapter 9).

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8.4.1.7 Where a trustee uses trust funds for his own personal benefit

s Foskett v McKeown (2001) (see Chapters 9 and 14).

8.4.1.8 Where a fiduciary fails to disclose the existence of a contract in his personal favour that is relevant to his fiduciary duties

s IDC v Cooley (1972) (see Chapter 9).

8.4.1.9 Receipt of unauthorised commission or fees related to their fiduciary duties

s Re Macadam (1946) (see Chapter 9).

s Note, however, Re Gee (1948) where the director was appointed as such not by the beneficiaries but by other shareholders not having a connection to the trust. He was therefore allowed to keep his fees.

8.4.1.10 Where a third party has dishonestly assisted in a breach of trust

Though strictly speaking there is no trust property here for the trust to operate – see Chapter 14.

s The test is objective – would a reasonable man think that the third party had been dishonest taking into account his age, qualifications and experience? (Royal Brunei Airlines v Tan (1995); Abou- Rahmah v Abacha (2006).)

8.4.1.11 Where a third party has knowingly received trust property such that it would be unconscionable for the third party to retain the benefit of the receipt s BCCI v Akindele (2001) – see Chapter 14.

8.4.1.12 Mutual wills

s Here two persons (usually husband and wife) agree that on the death of the first to die, all their property shall accrue to the other party and after the survivor’s death to beneficiaries nominated by the parties.

s The parties make ‘mutual wills’ to this effect and if so the property is held on constructive trust by the survivor for the beneficiaries.

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s There must be an agreement to make irrevocable wills (In the Goods of Heys (1914)).

s The mere fact that the parties make wills at the same time in similar terms does not per se create a mutual will (Re Oldham (1925)).

s Irrevocability need not be in exact words but could be inferred from the circumstances.

Case:

Re Cleaver (1981)

An elderly couple married in 1967, the husband having three children from a previous marriage.

The couple made wills, leaving everything to each other and in default to the three children. In 1974 each party made a new will reducing the share of one of the daughters to a life interest only. When the husband died the wife made a new will which likewise left the daughter a life interest only but with absolute interests to the other two children.

Later the wife made another will enlarging that daughter’s life interest to an absolute one and leaving the residue to that daughter also; the other two children were disinherited.

Held

When the wife died the court held that the estate was held in trust as per the 1974 will. This will was irrevocable due to:

s the similarity of the original wills;

s the fact also they were created at the same time.

s The successive wills were also made simultaneously and

s both parties reduced the daughter’s interest;

s the terms of the new will made after the man’s death were consistent with the 1974 will.

s The court also took note that in the evidence adduced to the court the wife regarded herself as being obligated to leave her share to the children.

8.4.1.13 A seller under a specifically enforceable contract

s This applies where there is a contract for the sale of land or of shares in a private company, and

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