Remedial and Institutional Constructive Trusts

Remedial and Institutional Constructive Trusts Title: The remedial constructive trust has taken root in the United States and Canada: it is unlikely to do so in England Millett LJ in Restitution and Constructive Trusts 1998 114 LQR p399. Explain the differences between remedial and institutional constructive trusts and the advantages and disadvantages of each approach. Discuss whether judges in England and Wales are likely to adopt the remedial system. INTRODUCTION A definition of a trust, reflected in case law, suggests that a person with responsibility for property has an obligation in accordance with principles of equity to exhibit beneficence[1] towards any beneficiaries, any of whom might enforce this obligation[2]. The concept of the constructive trust is not overwhelmingly supported, with Hayton categorising it â€Å"â€Å"a fiction which provides a useful remedy when no remedy is available in contract or in tort†[3]. A constructive trust may be either institutional or remedial, although only institutional constructive trusts are acceptable practice in the UK at the present time. According to Halsbury â€Å"the remedial constructive trust†¦is not in reality a trust at all, but merely a remedial mechanism by which equity gives relief for fraud’[4]. The distinction between constructive trusts raise a number of issues that are of particular relevance when considering whether the law in England and Wales is likely to adopt the remedial system. It must be noted, however, that, whilst the importance of both proprietary estoppel[5] and Pallant v Morgan[6] equity are acknowledged as relevant to a discussion on constructive trusts, their applications are specific. Accordingly, due to constraints on space, their inclusion in this particular essay have been omitted[7]. DISCUSSION Whilst law in other jurisdictions needs to resort to such measures as the remedial system, law in the UK currently relies on the Statutes of Limitation[8], within which remedial constructive trusts may be considered to be related to the Limitation Act 1980[9]. The specific distinction between legal and equitable ownership originated through the historical significance of common law and the law of equity, as established through the Courts of Chancery. It is readily acknowledged that a correlation exists between constructive trusts and the doctrine of equity, with effect from the date in which circumstances dictated a need for such intervention, a factor noted in Westdeutsche Bank[10] by Browne-Wilkinson, LJ who observed that â€Å"A remedial constructive trust†¦Ã¢â‚¬ ¦is a judicial remedy giving rise to an enforceable equitable obligation†¦Ã¢â‚¬ [11] Institutional Constructive Trust There have been a number of significant cases heard, where the courts have ruled that institutional constructive trusts will prevail[12]. An institutional constructive trust might be invoked in such cases as domestic disputes involving property, breaches within a fiduciary relationship, contracts relating to sales of land, and certain situations relating to commercial insolvency. Case law established ‘in law and in equity that land could be the subject of ownership’[13], with a further recognition that ‘the person owning either type of estate has a right of property’ according to Lord Browne-Wilkinson[14], established through statute in the Law of Property Act 1925. Freehold land, or land held in fee simple, relates to land held in trust to the Crown, with the owners being beneficiaries, or trustees, or land that is held in cestuis que trust which is revealed as an equitable estate. The requirement for a formal record of equitable entitlement to the transfer of land in accordance with the Law of Property Act 1925 53 (2)[15] reveals a situation inconsistent with the ethos of remedial trusts. Shares in property can be transferred from the owner of a property to bestow the gift of beneficial ownership on another person through the conveyancing procedure of legal transfer by deed according to the Law of Property Act 1925, section 52 (1). Conversely, where full consideration has not been paid when land is transferred an inference of fact would result, as clarified in Subsection 60(3) of the Law of Property Act 1925. Remedial Constructive Trusts Pascoe[16] notes an apparent lack of consensus as to whether remedial constructive trusts are based on an enforcement of proprietary rights or to avoid unconscionable conduct, but suggests it ‘is imposed by equity regardless of actual or presumed agreement or intention’[17] in order for the courts to implement a measure of restitution[18]. Certain situations require a remedy within the law that is particularly suitable for a specific set of circumstances. This is determined at the discretion of the court and is realised in the imposition of a remedial constructive trust, characterised by the particular facet that no trust existed prior to the intervention of the court. An interesting development in the definition attached to constructive trusts was suggested in Barnes v Addy[19] in which Lord Selborne, LC introduced the distinction between a duty owed by directors and duty owed by ‘non-fiduciary strangers’, referring to this concept as ‘the two limbs o f Barnes v Addy’. More recently this referent has been recognised as ‘recipient liability’[20] and ‘accessory liability’[21]. Various jurisdictions around the world acknowledge a distinct emphasis between institutional constructive trusts and remedial constructive trusts, based on the common law precepts of unjust enrichment. The constructive trust would then be recognised as a means of restitution[22], a remedy available for the courts to resort to when other methods of restitution are inappropriate. Often considered synonymous with remedial constructive trusts is the case of Polly Peck International plc (in admin) (No 2)[23]. Referring to additional rights of restitution that might be accorded the plaintiff in respect of legitimate rights to property the Court of Appeal in England made reference to the decision in the Supreme Court in Canada[24]. Different Jurisdictions Amongst the different jurisdictions who habitually utilise the remedial approach, Australia[25] generally adheres to a traditional approach characterised by a link between claimant and the property at dispute, whilst acknowledging the distinction between recipient and accessory[26] liabilities. Accordingly, remedies might be applied ‘in personam’ rather than ‘in rem’. According to Fardell and Fulton[27], the constructive trust has become an important remedy within the courts in New Zealand, fully utilising the concept of remedial constructive trusts in any situation in which a defendant might have prejudiced a plaintiff’s claim to equity as a matter of principle[28]. This particular application of the remedial system has been criticised by the judiciary in Australia as they perceive it represents â€Å"a medium for the indulgence of idiosyncratic notions of justice and fairness†[29]. However, at the New Zealand Court of Appeal Tipping, J concur red with the Australian opinion, although using different reasoning[30]. There have, however, been instances whereby a more controversial approach has been taken, often utilised in the US[31] although, on occasion, in other jurisdictions such as New Zealand in the case of Re Liggett[32] based, as it was, on the decision in the US case of Chase Manhattan Bank. Since then, however, both the Privy Council[33] and the House of Lords[34] have overruled that decision[35]. The law relating to constructive trusts has recently changed in Canada following the Supreme Court’s ruling in the cases of Soulos v. Korkontzilas[36]. Prior to this, such cases as Pettkus v Bekker[37], Sorochan v Sorochan[38] and Rosenfeldt v Olson[39] were the definitive referents in relation to remedies imposed by the courts to prevent the perpetuation of injustices within the specific categories associated with benefiting through unjust enrichment[40]. The Supreme Court focused on the ethos of ‘good conscience’ in their decision when ruling on Soulos v. Korkontzilas[41] . They decided that constructive trusts needed to be imposed to maintain certain standards[42], with four conditions introduced, each of which must present if a constructive trust was to be implemented[43]. Subsequently, these conditions have been applied to all cases relating to constructive trusts heard in Canada’s Supreme Court. CONCLUSION It has been suggested that every resulting trust is realised through the transfer of property in a situation where benefit to the recipient was not the intended option, the consequence of which is a presumption of resulting trust. This significance is recognised in the doctrine of equity in terms of recognition of the terms of endowment. In the UK it is in this particular situation that the inherent importance between constructive and resulting trusts lie. Furthermore, it is this particular situation in which other jurisdictions more often introduce the doctrine of remedial trusts. It appears to be accepted by the majority of commentators that, for a resulting trust to be formed, actual assets must be present in terms of identifiable property, the remedy of which may be found in common law. Despite Millett LJ being of the opinion that the remedial approach is unlikely to take root in England[44], it has been acknowledged in the Court of Appeal[45], the Privy Council[46] and in the House of Lords[47], in obiter dicta, that a possibility might exist for the future incorporation of remedial constructive trusts into UK legislation. This controversy has, by no means been resolved and, at some point will undoubtedly become incorporated into UK legislation, either in its present format, or modified to enable â€Å"†¦an aggrieved party to obtain restitution†[48] through the correlation that exists between constructive trusts and the doctrine of equity which is represented through the concept of morality and obligations, with â€Å"the benefit of an obligation [being] so treated that it has come to look rather like a true proprietary right†[49]. Total Word Count [excluding footnotes and bibliography]: 1,496 words BIBLIOGRAPHY BOOKS: Cope, M (1992): Constructive Trusts. Sweet and Maxwell Maitland, F W (1936): Equity. Cambridge: Cambridge University Press. Page 115 Underhill and Hayton (1995): Law of Trusts and Trustees [15th ed]. London: Butterworth: Page 1 Wilkie, Margaret; Luxton, Peter; and Malcolm, Rosalind (1998): Blackstone’s Land Law. London: Blackstone Press, Page 111 HALSBURY’S LAWS Available Online from: Butterworth’s Direct Search facilities. Access via Athens Gateway: http://www.butterworths.com/butterworths.asp Vol 16 (2000 Reissue) Para 1072 Vol 48 (2000 Reissue) Paras 401 – 403: former Court of Chancery Vol 48 (2000 Reissue) Para 501. Vol 48 (2000 Reissue) Para 592 ARTICLES: Austin, RP (1988): The Melting Down of the Remedial Trust. 11 NSWLJ 66. Available from: Pascoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia. Available from: http://www.lbc.com.au/academic/ccl-ezine/pdf/vol8issue1_RemedialTrusts.pdf [Accessed 24th July 2005] Bryan, M (1995): Cleaning up after Breaches of Fiduciary Duty – the Liability of Banks and other Financial Institutions as Constructive Trustees. In 7 Bond Law Review 67. Available in: Pascoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia. Available from: http://www.lbc.com.au/academic/ccl-ezine/pdf/vol8issue1_RemedialTrusts.pdf [Accessed 24th July 2005] Dodds, J (1988): The New Constructive Trust: An Analysis of its Nature and Scope. 16 MULR 482. In Pascoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia. Available from: http://www.lbc.com.au/academic/ccl-ezine/pdf/vol8issue1_RemedialTrusts.pdf [Accessed 24th July 2005] Fardell, R and Fulton, K (1991): Constructive Trusts-A New Era. NZJL: 90. In Pascoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia. Available from: http://www.lbc.com.au/academic/ccl-ezine/pdf/vol8issue1_RemedialTrusts.pdf [Accessed 24th July 2005] Hayton, DJ (1985): Personal Accountability of Strangers as Constructive Trustees. 27 Malaya LR 313,314: Singapore Journal of Legal Studies. Access via ATHENS Gateway McKendrick, E (1994): Unascertained Goods: Ownership and Obligation Distinguished. 110 LQR 509 513 Millett LJ (1998): Restitution and Constructive Trusts 114 LQR p. 399 O’Connor, P (1996): Happy Partners or Strange Bedfellows: the Blending of Remedial and Institutional Features in the Evolving Constructive Trust 30 MULR 735. In Pascoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia. Available from: http://www.lbc.com.au/academic/ccl-ezine/pdf/vol8issue1_RemedialTrusts.pdf [Accessed 24th July 2005] ONLINE RESOURCES Pascoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia. Available from: http://www.lbc.com.au/academic/ccl-ezine/pdf/vol8issue1_RemedialTrusts.pdf [Accessed 24th July 2005] TABLE OF CASES: Baden Delvaux and Lecuit v Societe Generale [1993] 1 WLR at 509, 575 Bannister v Bannister [1948] 2 All ER 133 Banner Homes Group plc v Luff Developments Ltd [2000] Ch 372, CA Barnes v Addy (1874) LR 9 Ch App 244 Beatty v Guggenheim Exploration Co 225 NY 380 at 386 [1919] Chase Manhattan Bank NA v Israel British Bank (London) Ltd [1981] Ch 105 Cia de Seguros Imperio (a body corporate) v Heath (REBX) Ltd (formerly CE Heath Co (North America) Ltd) [2000] 2 All ER (Comm) 787; [2001] 1 WLR 112, CA Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371 Fortex Group Ltd (In Rec and Liq) v MacIntoshes [1994] 3 WLR 199; [1998] 3 NZLR 171. Hussey v Palmer [1972] 3 All ER 70 (CA) Linter Group Ltd v Goldberg (1986) 160 CLR 371 Mabo v Queensland (No 2) [1992] 175 CLR 1, High Court of Australia Metall und Rohstoff AG v Donaldson Lufkin Jenrette Inc [1990] 1 QB 391 and [1989] 3 All ER 14 CA Muschinki v Dodds (1985) 160 CLR 583 at 614 Pallant v Morgan [1953] Ch 43, and [1952] 2 All ER 951 Paragon Finance plc v DB Thakerar Co (a firm) [1999] 1 All ER 400, CA Pettkus v Bekker [1980] 19 RFL (2d) 165 Polly Peck International plc (in admin) (No 2) [1998] 3 All ER 812 at 825-826 Re Goldcorp Exchange Ltd Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74; [1994] 3 WLR 199 and [1994] 2 All ER 606 PC Re Liggett v Kingston [1993] 1 NZLR 257 Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812, and [1998] 2 BCLC 185, CA Re Sharpe [1980] 1 WLR 219 Rosenfeldt v Olson 1 BCLR (2d) 108, [1986] 3 WWR 403, 25 DLR (4th) 472 (CA). Sorochan v Sorochan [1986] 2 SCR 39 Soulos v Korkontzilas [1997] S.C.J. No. 52 Taylor v Davies [1920] AC 636, PC Tinsley v Milligan [1993] 3 WLR 126; [ 1994] 1 A.C. 340, 371 Westdeutsche Landesbank Girozentrale v. Islington London BC [ 1994] 4 All E.R. 890, 962, CA.; varied [ 1996] 2 All E.R. 961, HL; [ 1996] 2 All E.R. 961, 990, H.L; [1996] AC 669 at 714-415 1 Footnotes [1] See Beatty v Guggenheim Exploration Co 225 NY 380 at 386 [1919] [2] This definition is paraphrased from Halsbury’s Laws, Vol. 48 (2000 Reissue) at para 501 who have based this definition on Underhill and Hayton ( ): Law of Trusts and Trustees [15th ed]: Page 1 [3] Hayton, DJ (1985) 27 Mal LR 313,314 [4] Halsbury’s Law, Vol 48 (2000 Reissue) Para 501 [5] Halsbury’s Laws, Vol 16 (Reissue) Para 1072 and Vol 48 at 592 [6] Pallant v Morgan [1953] Ch 43, and [1952] 2 All ER 951. Halsbury’s Laws, Vol 48 at 593 [7] Banner Homes Group plc v Luff Developments Ltd [2000] Ch 372, CA per Chadwick LJ: this case introduced the term Pallant v Morgan equity [8] In accordance with the former Court of Chancery, Halsbury’s Laws, Vol 48, Paras 401 – 403 ante [9] Halsbury’s Laws, Vol 48 (2000 Reissue) Para 501 cites a number of cases relating to this point: Halsbury quotes Taylor v Davies [1920] AC 636, PC; Paragon Finance plc v DB Thakerar Co (a firm) [1999] 1 All ER 400, CA; Cia de Seguros Imperio (a body corporate) v Heath (REBX) Ltd (formerly CE Heath Co (North America) Ltd) [2000] 2 All ER (Comm) 787, and [2001] 1 WLR 112, CA [10] Westdeutsche Bank Landesbank Gironsentrale v Islington London BC [1996] AC 669 at 714-415 per Lord Browne-Wilkinson [11] â€Å"Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which gave rise to it: the function of the court is to declare that such a trust has arisen in the past. The consequences that arise from such a trust having arisen (including the possibly unfair consequences to third parties who, in the interim, have received the trust property) are also determined by rules of law, not under discretion. A remedial constructive trust, as I understand it, is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court†. Ibid, Note 9 [12] Bannister v Bannister [1948] 2 All ER 133, Re Sharpe [1980] 1 WLR 219 and Beatty v Guggenheim Exploration Co 225 NY 380 at 386 [1919] [13] Mabo v Queensland (No 2) [1992] per Deane and Gaudron JJ [14] Tinsley v Milligan (1994): â€Å"English law has one single law of property made up of legal and equitable interests† per Lord Browne-Wilkinson [15] Wilkie, Margaret; Luxton, Peter; and Malcolm, Rosalind (1998): Blackstone’s Land Law. London: Blackstone Press, Page 111 [16] Pascoe, Janine ( ): Remedial Constructive Trusts and Corporate Insolvency: An Australian Perspective. Senior Law Lecturer, Department of Business Law Taxation, Monash University, Australia. [17] Muschinki v Dodds (1985) 160 CLR 583 at 614 per Deane J. Also Cope, M (1992): Constructive Trusts [18] Pascoe quotes a number of references from Australian literature: O’Connor, P (1996): Happy Partners or Strange Bedfellows: the Blending of Remedial and Institutional Features in the Evolving Constructive Trust. 30 MULR 735; Also Bryan, M (1995): Cleaning up after Breaches of Fiduciary Duty – the Liability of Banks and other Financial Institutions as Constructive Trustees. 7 Bond Law Review 67; Also Austin, RP (1988): The Melting Down of the Remedial Trust. 11 NSWLJ 66; Also Dodds, J (1988): The New Constructive Trust: An Analysis of its Nature and Scope. 16 MULR 482. [19] Barnes v Addy (1874) LR 9 Ch App 244 [20] See Baden Delvaux and Lecuit v Societe Generale [1993] 1 WLR per Gibson, J at 509; 575 [21] Known as constructive trustees. This relates to a personal liability to an accessory to fraud [22] McKendrick, E (1994): Unascertained Goods: Ownership and Obligation Distinguished 110 LQR 509 [23] Polly Peck International plc (in admin) (No 2) [1998] 3 All ER 812 at 825-826 [24] See Soulos v Korkontzilas [1997] S.C.J. No. 52 [25] Pacoe, Janine: Remedial Constructive Trusts and Corporate Insolvency: an Australian Perspective. Department of Business Law Taxation, Monash University, Australia [26] LinterGroup Ltd v Goldberg (1986) 160 CLR 371: Constructive trustee was Linter Group as plaintiff. Goldberg Furst were directors of Arnsberg Pty Ltd who breached fiduciary duty. Southwell, J granted Linter Group priority over other creditors in terms of equitable claims and Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371: this claim was rejected [27] Fardell, R and Fulton, K (1991): Constructive Trusts-A New Era. NZJL: 90 [28] See Fortex Group Ltd (In Rec and Liq) v MacIntoshes [1998] 3 NZLR 171. See also: Re Goldcorp Exchange Ltd [1994] 3 WLR 199 as it represents opposing characteristics [29] Muschinski v Dodds (1985) 160 CLR 583 per Deane J [30] â€Å"the plaintiffs must be able to point to something which can be said to make it unconscionable—contrary to good conscience—for the secured creditors to rely on their rights a law†Fortex Group Ltd (in rec liq) v MacIntosh [1994] 3 WLR 199 per Tipping, J [31] Chase Manhattan Bank NA v Israel British Bank (London) Ltd [1981] Ch 105 [32] Re Liggett v Kingston [1993] 1 NZLR 257 [33] Re Goldcorp Exchange Ltd [1994] 3 WLR 199 [34] Westdeutsche Landesbank Girocentrale v Islington Borough Council [1996] AC 669 [35] Constraints of space preclude a more detailed investigation of any of the cases [36] Soulos v. Korkontzilas [1997] S.C.J. No. 52 [37] [1980] 19 RFL (2d) 165 [38] [1986] 2 SCR 39 [39] 1 BCLR (2d) 108, [1986] 3 WWR 403, 25 DLR (4th) 472 (CA). [40] â€Å"absence of any juristic reason† [41] Soulos v. Korkontzilas [1997] S.C.J. No. 52 [42] â€Å"†¦a constructive trust may be imposed where good conscience so requires. I conclude that in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation†: Soulos v. Korkontzilas [1997] S.C.J. No. 52, per Justice McLaughlin [43] Breach of an equitable obligation; assets still with defendant; plaintiff to present legitimate reason for recourse to courts; no third parties who might be unjustly penalised through a constructive trust [44] Millett LJ in Restitution and Constructive Trusts 1998 114 LQR p. 399 [45] Metall und Rohstoff AG v Donaldson Lufkin Jenrette Inc [1990] 1 QB 391 and [1989] 3 All ER 14 CA; Also Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812, and [1998] 2 BCLC 185, CA [46] Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74 and [1994] 2 All ER 606 PC [47] Westdeutsche Landesbank Gironzentrale v Islington London Borough Council [1996] AC 669, and [1996] 2 All ER 961, HL [48] Hussey v Palmer [1972] 3 All ER 70 (CA) per Lord Denning [49] Maitland, F W (1936): Equity. Cambridge: Cambridge University Press. Page 115