[1] 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.
[2] The constructive trust is intended to take the property from the defendant's control, preventing them from causing additional harm with it.
In Paragon Finance plc v DB Thakerar & Co,[3] Millett LJ defined a constructive trust as a trust that "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 arises whenever an owner either ignores, or interferes, with the rights of another person with an interest in that property.
In Westdeutsche Landesbank v Islington London Borough Council,[6] 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".
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.
[10] 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.
[11] In Banner Homes Group plc v Luff Developments Ltd,[12] 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.
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.
Trustees, company directors, agents and business partners are all fiduciaries, as in Yugraneft v Abramovich,[20] but other positions may be recognised by the court if the misuse of powers in a particular circumstance renders them so, as in Reid.
[30] 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.
Where a person in a fiduciary office earns unauthorised profits as a result of their position, this money is held on constructive trust.
[34] This principle originated with Keech v Sandford,[35] and the rule was first fully defined in Bray v Ford,[36] where Lord Herschell said that: It is an inflexible rule of the court of equity that a person in a fiduciary position...is not, unless otherwise [authorised,] entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.
I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect.
[37]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.
If the fiduciary has informed the beneficiaries that he is acting on his own behalf, and has received permission to do so, the property would not have been held on constructive trust.
[44] Further expansion of the principle was later given in FHR European Ventures LLP v Cedar Capital Partners LLC.
In Lloyds Bank v Rosset,[46] the House of Lords set out the circumstances in which a trust of common intention can arise.
Secondly, where the parties contribute to the purchase price or mortgage payments and therefore practically demonstrate a common intention to claim an equitable interest; 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 contract transfers the equitable interest from the original owner to the other party, which takes place through a constructive trust.
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 Walters v Olins.
[1] 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.