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(iii) The Constructive Trust

(1) The Nature of the Constructive Trust

A further mechanism by which the claimant can obtain an equitable interest in property held by the defendant is the constructive trust. A constructive trust is a true trust like any other, where the constructive trustee has legal title to identifiable property that is held for the benefit of the beneficiaries. But the distinctive feature of a constructive trust is that it arises by operation of law, without regard to the intentions of the parties.[1] The constructive trust clearly differs, therefore, from an express trust, which is created by the settlor’s intent, and the resulting trust, which is triggered by a presumed or imputed intent on the part of the transferor that property is to be held on trust for him or her. Further, according to Lord Browne-Wilkinson, the constructive trust responds to unconscionable conduct on the part of the recipient.[2]

Much of the complexity of the law in this area derives from fundamental confusion as to what is meant by the constructive trust. In fact, five different meanings of the constructive trust can be identified.[3]

(a) Institutional Constructive Trust

The institutional constructive trust is the orthodox model for analysing these trusts, which are treated as arising by operation of law on the occurrence of a certain event where a constructive trust has previously been recognized.[4] These events have the common characteristic that the defendant’s conscience can be considered to have been affected by the circumstances surrounding the transfer of property.[5] [6] Under this category of the constructive trust, the court simply recognizes that the trust has already arisen, without having any discretion as to whether or not to do so.

(b) Remedial Constructive Trust

This is recognized where a judge, in the exercise of his of her discretion, considers it to be appropriate that proprietary relief is available to the claimant. Unlike the institutional constructive trust, the remedial version involves the judicial creation of equitable proprietary interest.

The essential distinction between institutional and remedial constructive trusts was summarized by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC22

Under an institutional constructive trust the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such a trust having arisen (including the potentially unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not under a discretion. A remedial constructive trust, as I understand it, is different. It is a judicial remedy giving rise to an enforceable obligation: the extent to which it operate retrospectively to the prejudice of third parties lies in the discretion of the court.

This type of trust has been recognized in Australia, Canada, and New Zealand, but not in England.[7]

(c) Constructive Trust as Remedy

Where the claimant has an existing equitable interest in property that has been misappropriated and that property, or substitute property which can be regarded as representing the original property,[8] has been received by a third-party defendant, the claimant will wish to recover the property from the defendant.[9] A mechanism for doing so is the constructive trust. The court can order that the defendant holds the property on constructive trust for the claimant and the claimant can then call for the property to be transferred to him or her. Here, the constructive trust operates simply as a remedial mechanism to enable the transfer of the property to the claimant in Equity. It is different from the remedial constructive trust, because that involves the creation of an equitable proprietary interest that had not previously existed. Where the constructive trust as remedy is used, there is already an equitable proprietary interest in existence, which will typically have been created by an express trust; the constructive trust simply operates as a conduit for the transfer of property from the defendant to the claimant. Whether it is appropriate to use the language of the constructive trust as remedy in this context is, however, a matter of some controversy. It has been suggested that, if the claimant’s original equitable interest arises under an express trust, the defendant who has received the property, or its substitute, should hold that property on the same trust.[10] But this argument is unconvincing. The defendant who has received the property will not be under the same trust obligations as the original express trustee, such as being subject to an obligation to invest the trust property. The better view, therefore, is that the recipient does indeed hold the property under a distinct trust, which, because it arises by operation of law, should be characterized as a constructive trust.

(d) Liability as a Constructive Trustee

English law recognizes certain causes of action arising from the defendant’s interference with trust property or involvement with a breach of fiduciary duty. These actions are known as unconscionable receipt[11] and dishonest assistance.268 The liability of the defendant in these claims has traditionally been described as a liability to account as a constructive trustee. But such language is inappropriate. The defendant’s liability is only a personal liability, either to restore the value of any property received in breach of trust or fiduciary duty or to compensate the claimant for loss suffered as a result of the defendant’s assistance with a breach of trust or fiduciary duty or exceptionally to award a gain-based personal remedy. The remedy is not proprietary because it involves only a personal liability to account or to compensate and so has nothing to do with the constructive trust. This was recognized by Lord Millett in Dubai Aluminium Co Ltd v Salaam.[12]

(e) Common Intention Constructive Trust

Although the constructive trust traditionally arises without regard to the intention of the parties, there is a distinct form of constructive trust that is triggered with reference to the express, implied, or imputed intention of the parties, and which is known as the common intention constructive trust. This is a trust that arises from an agreement or understanding of the parties as to whether they have a beneficial interest in property and, if so, what the extent of that interest might be. This is especially significant where a couple have cohabited and their home is registered either in the name of them both[13] or in the name of one of them only.[14] Although the language of the constructive trust is used in these cases, this is very different from the ordinary constructive trust, because it responds to the intention of the parties, although equitable proprietary rights are recognized as a consequence. [15]

(f) Summary

The orthodox view in English law is that the constructive trust is a substantive institution which will be recognized in certain circumstances;[16] this is a real trust. But Birks[17] suggested that all constructive trusts are fictions, like the fictional implied contract which was at the core of the law of restitution for many years,[18] because the declaration of trust only exists in the eye of the law. But is this trust really fictional? Surely it simply involves a different method of declaring a trust, but it does involve a real trust with real proprietary interests. The deemed declaration of a constructive trust is a deliberate attempt by Equity to recognize a real trust in certain well-defined circumstances. There is no fiction. If the trust was not real then it would indeed be fictional, which is why the so-called constructive trust which is recognized where the defendant is held liable for unconscionable receipt or dishonest assistance should not be called a trust at all, since it is only a cipher for a personal remedy. Since the constructive trust is a real trust it follows that, from the date of creation of the trust, the beneficiary has an equitable proprietary interest in the trust property which can be vindicated as appropriate.

  • (2) Circumstances When an Institutional Constructive Trust Will Be Recognized Lord Scott[19] recognized that it is not possible to prescribe exhaustively the circumstances under which a constructive trust will be created, so the focus should instead be placed on recognizing particular factual circumstances under which the constructive trust will, and will not, be relevant. The constructive trust has been recognized in a variety of different circumstances.
  • (a) Breach of Fiduciary Duties

Where the defendant owes a fiduciary duty to the claimant and receives property in breach of that duty277 the defendant may be required to hold that property on constructive trust for the claimant. This does not involve the operation of the constructive trust as a remedy, because the principal did not have an equitable proprietary interest in the property prior to the breach of duty. Rather, this proprietary interest arises by operation of law. This was recognized by the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC278 where it was held that a bribe received by a fiduciary in breach of fiduciary duty was held on constructive trust for the principal, and this was specifically characterized as an institutional rather than a remedial constructive trust.

(b) Unconscionable Retention

Constructive trusts will also be recognized more generally in circumstances where the defendant’s conduct can be considered to be unconscionable, even though the defendant did not owe fiduciary duties to the claimant. Although unconscionability is at the heart of this category, as it is with all categories of constructive trust, it is a distinct category because unconscionability is determined with specific regard to the fault of the defendant. This is the effect of an important dictum of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC279 relating to the appropriate interpretation of Chase Manhattan Bank NA v Israel-British Bank (London) Ltd.280 In Chase Manhattan Bank it was held that, where the claimant had mistakenly paid the defendant the same amount of money twice, although legal title in the money which had been mistakenly paid had passed to the defendant, it was still possible for the court to recognize that the claimant had an equitable proprietary interest in the money. As Goulding J said:281 ‘a person who pays money to another under a factual mistake retains an equitable property in it and the conscience of the other is subjected to a fiduciary duty to respect his proprietary rights.’

Even though the claimant’s mistake might have been characterized as fundamental,282 presumably legal title to the money had passed to the defendant because it was no longer possible to identify the claimant’s money at Law as it had been mixed in the defendant’s bank account.283 It is unclear, however, how Goulding J could conclude that the claimant had an equitable proprietary interest in the money that had been received by the defendant. One explanation is that the claimant’s intention to benefit the defendant had been vitiated by its fundamental mistake so that the money was held on resulting trust for the claimant.284 Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC285 stated, however, that Goulding J was wrong to conclude that the claimant had an equitable proprietary interest in the money from the moment it had been received by the defendant simply because it had been paid by mistake, because there needed to be an identifiable event to create the equitable interest, and the fact that the claimant has paid money to the defendant by mistake is not a sufficient event to create such an interest. [20]

Although Lord Browne-Wilkinson did not express his conclusion in these terms, the effect of his analysis of Chase Manhattan Bank is that the defendant’s unjust enrichment by receipt of a mistaken payment is not a sufficient reason to trigger a constructive trust. But he did recognize that the money paid by mistake was subsequently held on constructive trust for the claimant, so that the claimant did indeed have an equitable proprietary interest in the money. This constructive trust arose because the defendant became aware that the claimant had paid the money to it by mistake within two days of its receipt of the money. As Lord Browne-Wilkinson said: ‘Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust... ’[21] In other words, the justification for the recognition of the claimant’s equitable proprietary interest in the money paid by mistake was that the defendant’s conscience had been affected by its knowledge of the mistake whilst it was in possession of the money. Once the defendant was aware of the mistake it should have repaid the money to the claimant, and its failure to do so constituted the unconscionable conduct that justified the recognition of the constructive trust. Lord Browne-Wilkinson went on to recognize that a thief who stole a bag of coins would similarly hold that property on a constructive trust, because of the thief’s unconscionable conduct in committing theft and retaining the stolen property.[22] Constructive trusts will be triggered by this principle of unconscionable retention in other circumstances as well, such as where the defendant has obtained property by fraud.[23]

If a constructive trust can be recognized once the defendant becomes aware that the claimant has paid money by mistake, presumably a constructive trust will arise whenever the defendant is aware that he or she has received a benefit that should not have been received and so should be returned. So, for example, if the defendant realizes that the claimant has paid money to him or her under a contract that is void, there is no reason why the defendant cannot be considered to have acted unconscionably in not repaying the money to the claimant. Consequently, on the facts of Westdeutsche Landesbank itself, where money had been paid by a bank in respect of a contract with a public authority that was void, the defendant public authority would presumably have held the money on constructive trust for the claimant bank had the money not ceased to be identifiable before the defendant discovered that the transaction was void. It follows that, once a defendant has discovered that a contract in respect of which money has been paid is void, the defendant’s continued retention of that money is unconscionable. But the constructive trust will be effective only if the defendant continues to have the money that can be the subject matter of the trust. If the defendant no longer has the money, there is no property on which the trust can bite and so there can be no effective trust. If a constructive trust can be recognized where the defendant knew that the transaction was void, what of the case where the defendant knows that the basis for the transaction has failed totally? There seems no obvious reason why a constructive trust could not exist in such circumstances also. Consequently, if Re Goldcorp Exchange289 were decided today it might be possible to conclude that the defendant held a quantity of bullion on constructive trust for the purchasers because it had been ‘behaving in a systematically unconscientious way. It had not the least intention of honouring its contracts in the manner which it made them’.290 Indeed, in Re Farepak Food and Gifts Ltd291 it was recognized that claimants, who had paid in advance for goods or services, could in principle claim that the money was held on constructive trust for them where the defendant, at the time of receiving payment, had already decided that the goods and services would not be provided because it would cease trading so that there would be a total failure ofbasis, although this could not be established on the facts.

There are three particular problems relating to the unconscionable retention head of constructive trusts.

(i) What Has Happened to the Legal Title? In all cases in which a constructive trust has been recognized the trustee must have legal title to the property. But this causes serious problems where, for example, property has been stolen, since, in such circumstances, the claimant’s legal title to the property will not have passed to the defendant until it ceases to be identifiable at Law292 because, for example, it has become mixed with the defendant’s own property. But, if the legal title has not passed, how can the defendant thief hold the stolen property on constructive trust for the victim? Since the property will still belong to the victim, it would appear that the thief cannot also hold the property on constructive trust for the victim.293 This was specifically recognized as a problem in Shalson v Russo.294 Despite this, Lord Browne-Wilkinson in Westdeutsche Landesbank295 and the High Court of Australia296 have recognized that a thief will indeed hold property on constructive trust for the victim. An explanation for this result has been suggested by Tarrant, who has argued that the thief holds his or her rights to possess the stolen property on trust for the victim.297 It has been recognized that a thief does indeed have a possessory title to the stolen property, so, for example, if that property is unlawfully taken from a thief by a third party, the thief can assert his or her possessory rights against that third party.298 It has further been recognized that the thief, or the person who obtains the stolen property from the thief, has a good title to the stolen property against anybody in the world except for the victim of the theft.299 It follows that the victim of theft has both a residuary legal title in the [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34]

stolen property and also an equitable proprietary interest in the thief’s possessory title by virtue of the thief’s unconscionable retention of that property. The victim then has a choice as to whether rely on his or her legal property right to assert a claim against the thief or the subsequent possessor of the stolen property, or instead to assert a claim founded on his or her equitable rights to the property against the thief or subsequent possessor of it. The advantage of relying on the equitable property right is that the remedies in Equity to vindicate property rights are much more extensive than at Law,[35] and the claimant is able to make a claim to recover the stolen property or its proceeds even though it has become mixed with other property.[36] [37]

  • (ii) The Degree of Fault What degree of fault is required on the part of the defendant before his or her conduct in retaining the property can be considered to be unconscionable? If the claimant paid money by mistake or if the transaction was invalid, it is clear that the defendant’s knowledge of the mistake or the invalidity of the transaction will be sufficient to characterize the defendant as acting unconscionably in not repaying the money to the claimant. Presumably, it will also be sufficient that the defendant believes or suspects that the claimant was mistaken or that the transaction was invalid.3 2 But should it be sufficient that the defendant ought to have known of the mistake or the invalidity of the transaction? If unconscionability were to encompass an objective test of what the defendant ought to have known, it would dramatically widen the circumstances in which a constructive trust will be recognized. But, due to the policy of the law to restrict claims to recover property, particularly because of the adverse effect that they have on the defendant’s creditors where the defendant is insolvent, the better view is that the rules for the imposition of constructive trusts should be interpreted restrictively with regard to the defendant’s conscience. Consequently, the defendant’s conscience should only be considered to be affected where he or she was actually aware of the claimant’s mistake or the invalidity of the transaction[38] and, in the light of that knowledge or suspicion, he or she should have returned the benefit received.[39]
  • (iii) Timing At what point must the defendant’s conscience be affected? Clearly, if the defendant knew of the mistake or the invalidity of the transaction when the property was received, it would be appropriate to recognize that the property was held on constructive trust for the claimant from that moment. Lord Browne-Wilkinson’s interpretation of Chase Manhattan Bank suggests that acquiring knowledge of the mistake two days after receipt of the money would have been sufficient to characterize the defendant’s conduct in retaining the money as unconscionable. But what if the defendant discovers the mistake months or even years later? The natural limit to the period during which we should consider whether the defendant’s conscience has been affected is once the defendant has lost the property received from the claimant, or the proceeds of or substitute for that property.[40] In other words, the question of recognizing a constructive trust is bound up with the question of following and tracing of property:[41] if the claimant’s property ceases to be identifiable according to the following and tracing rules, a constructive trust cannot be imposed, simply because there will be no identifiable fund to which the trust can attach.307 308 * This is the reason why a constructive trust was not recognized on the facts of Westdeutsche Landesbank because, when the defendant learned that the transaction was void, the claimant’s money had ceased to be identifiable.3

But if this analysis is right it might mean that the recognition of an equitable proprietary interest in Sinclair v Brougham309 was correct after all.[42] [43] [44] [45] [46] [47] For, in that case when the defendant discovered that it lacked capacity to receive deposits, the money it had received from the depositors was still traceable. This method of resurrecting Sinclair v Brougham was not intended by the House of Lords in Westdeutsche Landesbank. The only way that this result can be avoided, with the added benefit of dramatically restricting the recognition of equitable proprietary interests through constructive trusts, is by saying that the question of whether or not the defendant’s conscience has been affected should be judged only at the time the relevant property was received by the defendant. This would mean that both Sinclair v Brougham and Chase Manhattan should be rejected. This is inevitable; either they are both right or they are both wrong. This restrictive approach to the recognition of equitable proprietary interests also avoids the artifice of saying that the defendant own a piece of property absolutely and only subsequently will an equitable proprietary interest be carved from it for the benefit of the claimant. Whether such an interest can be recognized should be judged only at the time of receipt.

(c) Rescission

A further situation where the courts have recognized that property is held on constructive trust for the claimant is where the claimant has rescinded in Equity a contract made with the defendant.311 312 In The National Crime Agency v Robb312 Etherton C recognized that, when a transaction induced by fraudulent misrepresentation is rescinded, the property which was transferred pursuant to the transaction will be held on constructive trust for the transferor, assuming that it is possible to identify the transferred property or its traceable proceeds in the hands of the defendant.[48]

Since rescission in Equity only takes effect on the order of the court,[49] it follows that the claimant has no equitable proprietary interest in the property until the court order is made which will have the effect of vesting equitable title in the claimant, who can then recover the property.[50] Before the court order is made the claimant only has a mere Equity to rescind the contract, which is not sufficient to establish a proprietary restitutionary claim. [51] It is for this reason that the claimant will be barred from rescinding the transaction if a third party acquires an equitable interest in the property for value and without notice of the claimant’s right to rescind.[52] It has, however, been recognized that, where the contract was induced by fraud, the claimant will obtain an equitable proprietary interest in the property transferred from the point at which he or she makes the election to rescind,[53] and that this operates retrospectively to the date when the Equity to rescind arose.[54] Whether the equitable proprietary right arises on making the election to rescind or when the court makes its order matters, since the Equity to rescind will be defeated where the property has been obtained by a bona fide purchaser for value.

(d) Miscellaneous Cases Where Constructive Trusts Will Be Recognized

The defendant will hold property on constructive trust in a number of other circumstances. For example, where property has been transferred to the defendant on the understanding that the defendant would respect another party’s rights, it is unconscionable for the defendant subsequently to deny that other party’s rights, so the property will be held on constructive trust for that person.[55] Similarly, a constructive trust has been recognized where an executor sought to obtain a benefit through the abuse of his position.[56] Where a criminal obtains property as the result of the commission of a criminal offence, this property might be held on constructive trust for the victim of the crime, by virtue of the forfeiture principle.[57] Where one party leaves property in their will to another, such as their spouse, with a prior understanding that that person will leave the property in their will to an identified person,[58] [59] the property will be held on constructive trust by that other person for the benefit of the identified person.

(3) The Remedial Constructive Trust

Whereas an institutional constructive trust arises by operation of law from the date of the event which gives rise to it, the remedial constructive trust arises through the exercise of the judge’s discretion when it is considered to be just to recognize that the claimant has an equitable proprietary interest in property received by the defendant.[60] The recognition of such a remedy would have a profound effect on the law of restitution, since it would apparently enable judges to create equitable proprietary interests where it was felt that the justice of the case demanded it. This would enable the court to transfer an asset which belongs to the defendant, and in which the claimant did not have a pre-existing legal or equitable interest, to the claimant.[61] The key difference between the institutional and the remedial constructive trust is that, to recognize a remedial constructive trust, it is not necessary to establish that the claimant has a pre-existing proprietary right; the purpose of the remedial constructive trust is to create such a proprietary right.[62]

In England the constructive trust is characterized as an institutional trust which arises by operation of law by virtue of clearly defined principle. In some other jurisdictions such as Australia,[63] Canada,[64] and New Zealand,[65] the constructive trust is a remedial trust which arises by operation of judicial discretion. England is notoriously suspicious of the judge exercising such discretion: judges are not trusted. So, for example, Lord Camden in Doe v Kersey[66] said:

The discretion of a Judge is the law of tyrants; it is always unknown; it is different in different men; it is casual, and depends upon constitution, in temper and passion. In the best it is often times caprice; in the worst it is every vice, folly and passion to which human nature is liable.

As a consequence of this scepticism about judicial discretion, in England the remedial constructive trust is not recognized, as recently confirmed by the Supreme Court.[67] Surprisingly, the Supreme Court cited the judgment of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC[68] in support of this conclusion, but, whilst Lord Browne-Wilkinson certainly did not formally recognize the remedial constructive trust, he was clearly not adverse to the recognition of such a trust, just not at that point in time.

Lord Neuberger, who delivered the speech of the Supreme Court rejecting the remedial constructive trust in England, has expressed his concerns about the remedial constructive trust extra-judicially.[69] He noted that ‘the notion of a remedial constructive trust displays equity at its flexible flabby worst’. He considered it to be ‘unprincipled, incoherent and impractical’. He was opposed to its recognition in England for the following reasons:

  • (i) it would render the law unpredictable;
  • (ii) it would be an affront to the Common Law view of property rights and interests;
  • (iii) it would involve the courts usurping the role of the legislature: the creation of new property rights should be left to Parliament.[70] This possibly reflects a concern about use of the remedial constructive trust to contravene priorities on insolvency as identified by statute.[71]

But the real concern about the recognition of the remedial constructive trust is simply that we need clear rules as to whether or not equitable proprietary rights have been created, and the remedial constructive trust is antithetical to such clarity and predictability.[72] Birks consequently described the remedial constructive trust as a remedy that is ‘ugly, repugnant alike to legal certainty, the sanctity of property and the rule of law’.[73] He also recognized that:[74]

The law of remedies is not exempt from the demands of certainty and predictability: nor is the law as a whole intellectually respectable if, even at the level of remedies, it takes refuge in an inscrutable case to case empiricism. Practising lawyers need to be able to advise their clients as to the likely results of litigation. The judges on whom these results depend need the insulation from personal criticism which only objectively ascertainable rules and principles can provide.

In fact, in those jurisdictions where the remedial constructive trust is recognized, it does not involve the exercise of an unprincipled judicial discretion. Equally, the English approach to the constructive trust involves more flexibility than is typically acknowledged.

In both England and Australia in particular a sterile debate has developed about the constructive trust where there are two camps, institutional versus remedial. It is preferable to ditch the intemperate language and the lazy characterization and acknowledge that there is just one constructive trust which is recognized by both jurisdictions. Indeed, as Deane J said in Muschinski v Dodds,[75] ‘for the student of equity, there can be no true dichotomy between the two notions’. He added:[76]

The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundations of such principles... proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion, subjective views about which party ‘ought to win’... and ‘the formless void’ of individual moral opinion...

In fact, Muschinski v Dodds might be considered to be one of the worst examples in Australian jurisprudence of remedial discretion. The case concerned a cohabiting couple who held the home they had purchased and developed in proportion to their contribution to it by means of a constructive trust, but this trust was only imposed at the time the reasons of the court were published. Justice Finn has described this as ‘an astounding proposition’.[77] In some other Australian cases the remedial nature of the constructive trust is expressed with reference to the importance of only recognizing the trust if there are no other appropriate remedies available.[78] This itself is somewhat concerning, even though it purports to be principled, because it appears that there is no proprietary interest until the court creates one at the time of trial having considered what other remedies might be appropriate. It would be more appropriate to acknowledge that the constructive trust exists at the time of the relevant event, but the claimant might not be allowed to vindicate his or her equitable right because an alternative remedy would be more appropriate. Consequently, the constructive trust which already exists could be revoked if other judicial orders are capable of doing full justice.

In England the characterization of the constructive trust as institutional which cannot be modified by the exercise of judicial discretion, does not reflect the true operation of the constructive trust. For example, where the elements of proprietary estoppel have been established, the claimant’s rights might be vindicated by recognizing a constructive trust through the exercise of judicial discretion.[79] [80] In Boardman v Phipps345 fiduciaries who profited from breaching their fiduciary duty were found to hold their profit on constructive trust for the principal. But this trust was modified in respect of one of them, who was awarded an equitable allowance to reflect the value of his work in making the profit.[81] Further, even in England there has been some judicial support for the recognition of the remedial constructive trust. For example, in Westdeutsche Landesbank Girozentrale v Islington LBC,[82] Lord Browne-Wilkinson suggested that it might be appropriate for this type of trust to be introduced into English law because it would enable proprietary relief to be tailored to the particular circumstances of the case, although he refused to decide the point since it was not directly in issue.

The appropriate model of the constructive trust consequently is one where the trust arises by operation of law where the defendant’s receipt or retention of property is unconscionable, actual or deemed,[83] but this trust can be modified with reference to recognized principles, such that the trust might be defeasible. This characterization of the constructive trust would assuage some of Lord Neuberger’s concerns. It does not subvert the statutory insolvency regime, for what Equity has created Equity can take away, as long as it is done on a principled basis. Indeed, the very creation of equitable proprietary rights by operation of judge-made law might be regarded as upsetting statutory insolvency regimes, but there are numerous examples of Equity doing that. Modification of the institutional constructive trust is much less controversial than, for example, the Quist- close trust.[84]

Once it is accepted that the constructive trust might be modified, it is important to consider when such modification might be justified. Three different scenarios can be identified which derive from the three distinct advantages of proprietary relief,[85] namely where the defendant is insolvent; where the property has increased in value and where the property has been received by an innocent third party. The relevance of these factors can be illustrated by considering potential modification of the constructive trust of stolen property and mistaken payments.[86]

Where a thief holds stolen property for the victim should this trust be modified for any of these reasons? First, if the thief has become insolvent, should the thief’s creditors be able to assert a claim against the stolen assets? Since the stolen property never legitimately formed part of the thief’s pool of assets, there is no reason why the thief’s creditors should gain priority over the victim. Secondly, if the stolen asset has increased in value, there is no reason why the claimant should be deprived of the benefit of this increase, since the thief should not profit from his or her crime in any way.[87] Thirdly, should innocent third parties who have obtained possession of the asset have any better claim than the thief?353 If the third party’s conscience was not affected in any way at the time of receipt, since they neither knew nor suspected that the property had been stolen, surely their claim should be at least as good and possibly even better than that of the victim of the theft. It follows that the constructive trust of stolen property should not be modified to benefit creditors of the thief or the thief him or herself, but there might be a case to treat the constructive trust as revoked once the asset has been received by an innocent third party who has not provided value for the receipt.3

Where money paid by mistake is held on constructive trust because of the defendant’s unconscionable retention, should this trust ever be modified? First, if the defendant has become insolvent, there is no reason why the defendant’s creditors should have a better claim to the trust property than the claimant. Secondly, the defendant should not be allowed to gain from the retention of the asset, save where that gain cannot be causatively linked to the receipt. So, if the asset is invested and increases in value, the defendant should hold that increase on constructive trust. But, if the defendant used money paid by mistake to buy a lottery ticket which wins the jackpot, to determine whether that jackpot should be held on constructive trust should depend on whether it can be shown that, but for the receipt of the money paid by mistake, the defendant would not have bought the ticket. If the defendant would have bought the ticket anyway, and used the money paid by mistake by chance, this would be an appropriate reason to modify the constructive trust so that the jackpot is not held on trust. If the defendant did not rely on the receipt to buy the ticket, there is no reason why the claimant should have a proprietary claim to the jackpot. Thirdly, should the equitable proprietary right of the claimant be defeated by innocent receipt, not for value? Whilst the law assumes that the claimant should have a proprietary restitutionary claim against a third-party recipient who has not provided value,[88] [89] this is difficult to defend. The claimant should be confined to a proprietary claim against the unconscionable recipient of the mistaken payment and not have a proprietary claim against an innocent third-party recipient, at least where the only reason why the equitable proprietary right was created was because of the initial recipient’s unconscionable retention. If the third party’s receipt cannot similarly be characterized as unconscionable, there is no reason why the claimant should have a proprietary claim against that recipient.

It is important to emphasize that much of this analysis of the ‘remedial constructive trust’ is speculative, especially because the institutional constructive trust appears so entrenched in England. But it is the failure to consider carefully what is meant by institutional versus remedial constructive trusts that has resulted in an unsophisticated analysis of the constructive trust. If it was recognized instead that the constructive trust arises by virtue of recognized principles but can be modified in a principled way, the constructive trust would cease to be the blunderbuss that it is today.

  • [1] Air Jamaica v Charlton [1999] 1 WLR 1399, 1412 (Lord Millett).
  • [2] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 705 (Lord Browne-Wilkinson).
  • [3] Ibid, 714.
  • [4] Halifax Building Society v Thomas [1996] Ch 217, 229 (Peter Gibson LJ).
  • [5] See P Millett, ‘Restitution and Constructive Trusts’ (1998) 114 LQR 399, 400.
  • [6] [1996] AC 669, 714.
  • [7] FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250. See also RePolly Peck International (No 2) [1998] 3 All ER 812, 823 (Mummery LJ) and 830 (Nourse LJ); Metall undRohstoff AG v Donaldson, Lufkin and Jenrette Inc [1990] 1 QB 391, 478-80; and Halifax Building Society v
  • [8] Thomas [1996] Ch 217, 229 (Peter Gibson LJ). Whether such a trust should be recognized in England isconsidered at p 603, below. 264 By virtue of the tracing rules, see p 616, below.
  • [9] As occurred in Foskett v McKeown [2001] 1 AC 102. See p 633, below.
  • [10] Lord Millett, ‘Proprietary Restitution’ in S Degeling and J Edelman (eds), Equity in Commercial Law(Sydney: Lawbook Co, 2005), 315-16. See also Foskett v McKeown [2001] 1 AC 102, 108 (Lord Browne-Wilkinson).
  • [11] See p 645, below. 268 See p 521, above.
  • [12] [2002] UKHL 48, [2003] 2 AC 366,404. See also Paragon Financeplc v DB Thakerar and Co [1999] 1 AllER 400, 408 (Millett LJ) and Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189.
  • [13] Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432 and Jones v Kernott [2011] UKSC 53, [2012] 1
  • [14] AC 776. 271 Oxley v Hiscock [2004] EWCA Civ 546, [2005] QB 211.
  • [15] This has been extended to commercial arrangements: Yaxley v Gotts [2000] Ch 162; Banner HomesGroup Plc v Luff Developments Ltd [2000] Ch 372; Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619.See also Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752.
  • [16] See, for example, Metall und RohstoffAG v Donaldson, Lufkin and Jenrette Inc [1990] 1 QB 391, 478-80and Halifax Building Society v Thomas [1996] Ch 217, 229 (Peter Gibson LJ).
  • [17] Birks, ‘Property, Unjust Enrichment and Tracing’, 242. See also WJ Swadling, ‘The Fiction of the
  • [18] Constructive Trust’ (2011) CLP 1. 275 See p 45, above.
  • [19] In Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55, [2008] 1 WLR 1752, [30].
  • [20] See p 488, above. 278 [2014] UKSC 45, [2015] AC 250. See p 512, above. 279 [1996] AC 669, 714-15. See also Lord Browne-Wilkinson, ibid, 705, and Hussey v Palmer [1972] 1 WLR1286, 1290 (Lord Denning MR). 280 [1981] Ch 105. 281 Ibid, 119. 282 See p 574, above. 283 See further p 615, below. 284 See p 585, above. 285 [1996] AC 669, 715.
  • [21] Ibid. See also Bank of America v Arnell [1999] Lloyd’s Rep 399; Papamichael v National WestminsterBank plc [2003] 1 Lloyd’s Rep 341, 372 (Judge Chambers QC); Commerzbank AG v IMB Morgan plc [2004]EWHC 2771 (Ch), [2005] 1 Lloyd’s Rep 298, [36] (Lawrence Collins J); Re Farepak Food and Gifts Ltd [2006]EWHC 3272 (Ch), [40] (Mann J); Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch),[2013] Ch 156. In Singapore see Wee Chiaw Sek Anne v NgLi [2013] SCCA 36 [169]-[184]; in Australia seeWambo Coal Co Pty Ltd v Ariff [2007] NSWSC 589.
  • [22] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 716. See also Bankers Trust Co vShapira [1980] 1 WLR 1274; Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch)[2013] Ch 156, [276] (Stephen Morris QC).
  • [23] Stocks v Wilson [1913] 2 KB 235, 244 (Lush J); Halley v The Law Society [2003] EWCA Civ 97, [48](Carnwath LJ); Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Rep 341, 374 (Judge ChambersQC); Commerzbank AG v IMB Morgan plc [2004] EWHC 2771 (Ch), [2005] 1 Lloyd’s Rep 298), [36](Lawrence Collins J); Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2005] EWCA Civ 722;Campden Hill Ltd v Chakrani [2005] EWHC 911 (Ch).
  • [24] [1995] 1 AC 72. See p 77, above.
  • [25] Birks, ‘Trusts Raised to Reverse Unjust Enrichment’, 21.
  • [26] [2006] EWHC 3272 (Ch). See also Neste Oy v Lloyd’s Bankplc [1983] 2 Lloyd’s Rep 658 and ArmstrongDLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156, [129] (Stephen Morris QC).
  • [27] This is the effect of Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548.
  • [28] S Barkehall Thomas, ‘Thieves as Trustees: The Enduring Legacy of Black v S Freedman and Co’ (2009) 3J Eq 52. Also R Chambers, ‘Trust and Theft’ in E Bant and M Harding (eds), Exploring Private Law(Cambridge: Cambridge University Press, 2010), ch 10, who adopts an unjust enrichment analysis of theproprietary right that arises in such cases, as a consequence of his unacceptable assumption that unjustenrichment liability can create proprietary rights. See p 585, above.
  • [29] [2003] EWHC 1637 (Ch), [2005] Ch 281, [110] (Rimer J).
  • [30] [1996] AC 696, 7 1 6. 296 Black vFS Freedman and Co (1910) 12 CLR 105.
  • [31] 297 J Tarrant, ‘Property Rights to Stolen Money’ (2005) 32 UWALR 234,245; J Tarrant, ‘Thieves as Trustees:
  • [32] In Defence of the Theft Principle’ (2009) 3 J Eq 170, 172.
  • [33] Costello v Chief Constable of Derbyshire [2001] EWCA Civ 387, [2001] WLR 1437.
  • [34] Islamic Republic of Iran v Barakat Galleries Ltd [2009] QB 22, [15] (Lord Phillips).
  • [35] See p 632, below. 301 See p 618, below.
  • [36] 302 Although in Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Rep 341, 373, Judge
  • [37] Chambers QC said that actual knowledge is required.
  • [38] In Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 705 Lord Browne-Wilkinsonemphasized that the defendant’s conscience will only be affected where he or she knew ‘of the factors which arealleged to affect’ his or her conscience.
  • [39] Fitzalan-Howard (Norfolk) v Hibbert [2009] EWHC 2855 (QB), [49] (Tomlinson J).
  • [40] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 707 (Lord Browne-Wilkinson);
  • [41] Re Goldcorp Exchange Ltd [1995] 1 AC 74. 306 See p 607, below.
  • [42] Papamichael v National Westminster Bank pic [2003] 1 Lloyd’s Rep 341, 372 (Judge Chambers QC).
  • [43] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 689 (Lord Goff) and 707 (Lord
  • [44] Browne-Wilkinson). 309 [1914] AC 348. See p 585, above.
  • [45] See Birks, ‘Trusts Raised to Reverse Unjust Enrichment’, 22.
  • [46] See p 23, above. For rescission at law see p 580, above.
  • [47] [2014] EWHC 4384 (Ch), [49]. See also Lonrho pic v Fayed (No 2) [1992] 1 WLR 1, 12 (Milett J); Daly vSydney Stock Exchange (1986) 65 ALR 193, 204 (Brennan J).
  • [48] The National Crime Agency v Robb [2014] EWHC 4384 (Ch), [51] (Etherton C).
  • [49] See p 23, above.
  • [50] Bristoland West Building Society v Mothew [1998] 1 Ch 1, 23 (MillettLJ).
  • [51] Phillips v Phillips (1862) 4 De GF and J 208,45 ER 1164; Shalson vRusso [2003] EWHC 1637 (Ch), [2005]Ch 281, [111] (Rimer J); The National Crime Agency v Robb [2014] EWHC 4384 (Ch), [80] (Etherton C).
  • [52] Westminster Bank Ltd v Lee [1956] Ch 7.
  • [53] Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321, 332 (Atkin LJ); Lonrho plc v Fayed (No 2)[1992] 1 WLR 1,12 (Millett J); El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 734 (Millett J); Shalson vRusso [2003] EWHC 1637 (Ch), [2005] Ch 281, 316, [122] (Rimer J).
  • [54] The National Crime Agency v Robb [2014] EWHC 4384 (Ch), [80] (Etherton C).
  • [55] Binions v Evans [1972] Ch 359; Ashburn Anstalt v Arnold [1989] Ch 1. See B McFarlane, ‘ConstructiveTrusts Arising on a Receipt of Property Sub Conditions’ (2004) 120 LQR 667; N Hopkins, ‘Conscience,Discretion and the Creation of Property Rights’ (2006) 4 LS 475.
  • [56] James v Williams [2000] Ch 1. 322 See p 549, above.
  • [57] 323 This is called a ‘mutual wills contract’.
  • [58] 324 Ollins v Walters [2008] EWCA Civ 782, [2009] Ch 212.
  • [59] 325 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 714 (Lord Browne-Wilkinson).See also Metall Und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391, 479 (Slade LJ); Re
  • [60] Goldcorp Exchange Ltd [1995] 1 AC 74, 104 (Lord Mustill); London Allied Holdings v Lee [2007] EWHC2061 (Ch).
  • [61] Birks, ‘Trusts Raised to Reverse Unjust Enrichment’, 14.
  • [62] Re Polly Peck International plc (No 2) [1998] 3 All ER 812, 830 (Nourse LJ).
  • [63] Muschinski v Dodds (1985) 160 CLR 583; Grimaldi v Chameleon MiningNL (No 2) (2012) 200 FCR 296,[569] (Justice Finn).
  • [64] Pettkus v Becker (1980) 117 DLR (3d) 25 7. 330 Powell v Thompson [1991] 1 NZLR 597.
  • [65] 331 (1795) (CP) quoted in Bower’s Law Dictionary (1839).
  • [66] 332 FHR European Ventures Ltd v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250, [47]. Seealso Re Sharpe [1980] 1 WLR219; Re Polly Peck International plc (No 2) [1998] 3 All ER 812, 830 (Nourse LJ);Cobbold v Bakewell Management Ltd [2003] EWHC 2289 (Ch), [17] (Rimer J); Shalson v Russo [2005] Ch 281,
  • [67] [118] (Rimer J); Re Farepak Food and Gifts Ltd [2006] EWHC 3272 (Ch), [38] (Mann J).
  • [68] [1996] AC 669, 714-16.
  • [69] D Neuberger, ‘The Remedial Constructive Trust—Fact or Fiction’, delivered on 10 August 2014 to theBanking Services and Finance Law Association Conference, New Zealand.
  • [70] But the Supreme Court in FHR European Ventures Ltd v Cedar Capital Partners LLC [2014] UKSC 45,[2015] AC 250 surely did create a new property right in bribe money which had not existed previously.See p 512, above.
  • [71] See the decision of the Court of Appeal in Re Polly Peck International plc (No 2) [1998] 3 All ER 812.
  • [72] P Millett, ‘Equity—The Road Ahead’ (1995) 9 TLI 35, 42.
  • [73] PBH Birks, ‘Property and Unjust Enrichment: Categorical Truths’ [1997] NZ Law Rev 623, 641.
  • [74] PBH Birks, ‘The Remedies for Abuse of Confidential Information’ [1990] LMCLQ 460, 465.
  • [75] (198 5) 160 CLR 583, 614. 341 Ibid, 615.
  • [76] 342 Grimaldi v Chameleon MiningNL (No 2) (2012) 200 FCR 296, [569].
  • [77] 343 Bathurst CCvPWC Properties Pty Ltd (1998) 195 CLR 566, 585; John Alexander’s Clubs PtyLtd v White
  • [78] City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1, [37], [128].
  • [79] Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776. See p 520, above.
  • [80] [1967] 2 AC 46. See p 498, above. 346 See p 507, above.
  • [81] 347 [1996] AC 669, 716. See also Re Goldcorp Exchange Ltd [1995] 1 AC 74, 104 (Lord Mustill); LondonAllied Holdings v Lee [2007] EWHC 2061 (Ch), [247] (Etherton J); Thorner v Major [2009] UKHL 18, [2009]
  • [82] 1 WLR 776, [20] (Lord Scott).
  • [83] See p 598, above. 349 See p 593, above. 350 See p 558, above.
  • [84] 351 For similar analysis of the potential role of the remedial constructive trust where the defendant has
  • [85] profited from the breach of fiduciary duty, see p 513, above. 352 See p 526, above.
  • [86] 353 If the third-party recipient of the stolen property or its traceable substitute had provided value and acted
  • [87] in good faith, the victim’s equitable proprietary claim would be defeated. See Chapter 23.
  • [88] In Relfo Ltd v Varsani [2014] EWCA Civ 360, [2015] 1 BCLC 14, [1], Arden LJ, stated that money or itssubstitute can be recovered from a third party where the money was stolen by the fiduciary, if the money or itssubstitute was knowingly received by the third party. See also FHR European Ventures LLP v Cedar CapitalPartners LLC [2014] UKSC 45, [2015] AC 250, [44] where Lord Neuberger indicated that bribe money held onconstructive trust by a fiduciary could be claimed from a knowing recipient.
  • [89] Re Diplock’s Estate [1948] Ch 465, 539.
 
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