Sections Contest Property disposition Common types Other types Governing doctrines In trust law, a constructive trust is an equitable remedy imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to unjust enrichment or interference, or due to a breach of fiduciary duty, which is intercausative with unjust enrichment and/or property interference.
[7] A controversial example is the case of Attorney General for Hong Kong v Reid,[8] in which a senior prosecutor took bribes not to prosecute certain offenders.
His employer, the Attorney-General, sought a declaration that the property was held on constructive trust for it, on the basis of breach of fiduciary duty.
The case is different from Regal (Hastings) Ltd v Gulliver,[9] because there was no interference with a profit-making opportunity that properly belonged to the prosecutor.
[10] Being a Privy Council decision, Reid did not overrule the previous decision of the Court of Appeal of England and Wales in Lister v Stubbs[11] which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the claimant not enjoyed by the defendant's other creditors.
Supporters of Lister suggested that there was no good reason to put the victim of wrongdoing ahead of other creditors of the estate.
There was a tension in English law between Lister and Reid which was highlighted in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.[12] The United Kingdom Supreme Court subsequently overruled Sinclair in FHR European Ventures LLP v Cedar Capital Partners LLC,[13] holding that Lister was no longer good law.
The House of Lords said that the beneficiaries could choose between either: (a) a constructive trust over the proceeds for the proportion of the life insurance payout purchased with their money; or (b) an equitable lien over the fund for the repayment of that amount.
This is because there must be a reason why a new property right is created (i.e. the trust) and that must be because otherwise the family would be unjustly enriched by receiving the proceeds of the insurance policy purchased with the beneficiaries' money.
The reasoning, in this case, has been doubted, and in Westdeutsche Landesbank Girozentrale v Islington London Borough Council the House of Lords distanced itself from the idea that unjust enrichment raises trusts in the claimant's favour.
They agreed to make improvements to the property by building a pottery shed for the woman to do arts and crafts work in.
This trust did not arise the moment the woman commenced improvements – that conduct did not involve a breach of duty or an unjust enrichment etc.
Common intention constructive trusts were developed to fulfil the reasonable expectations of parties to family property disputes.
[18] To advance a common intention constructive trust theory, it must be shown that: The question of quantum must also be addressed.
In Rayner v Preston the claimant had purchased a property from the defendant, but the house was then destroyed in the fire before they could move in.
The defendant received a big payout from the insurance company and refused to give that money to the claimant.