What Exactly is a Remedial Constructive Trust?

Ten years ago the late Harold Ford invited me to revise the chapter on constructive trusts in Ford and Lee’s ‘Principles of the Law of Trusts’. He warned me that it is impossible to understand the law of constructive trusts in its entirety, and the experience of editing the chapter has confirmed my view that, to adapt Donald Rumsfeld’s dictum, in this area of equity there are definitely some ‘known unknowns’, and perhaps even some ‘unknown unknowns.’ Harold spent a year at Harvard in the 1950s studying under Austin Scott, best known for his magnum opus ‘Scott on Trusts’. Harold’s chapter on constructive trusts in Ford and Lee is influenced by Scott’s thinking, and includes a paragraph on remedial constructive trusts written before the topic became a matter for general debate among Australian equity lawyers. Harold and I occasionally spoke and emailed each other about remedial constructive trusteeship; he well understood the potential and limitations of remedialism. This paper is dedicated to the memory of an outstanding and kindly scholar who rekindled my interest in the law of constructive trusts.

1. Setting the Scene

Judicial and academic discussion of constructive trusts resembles a bazaar, not unlike the Grand Bazaar at Istanbul. It is very noisy; it is easy to lose your way in the labyrinthine pathways, and you cannot be sure that your purchase works properly until it has been tried out at home. Just as in the gloom of the covered market it can be hard to distinguish between vendors and purchasers, so in this area it can be hard to distinguish between judges and academics, if their identities are not known. Some judges approach constructive trust adjudication from the level of high theory while some academics ignore theory and are obsessed by practical considerations. The tourist leaves the constructive trust bazaar invigorated but confused. Two examples, tediously familiar to the equity lawyer or teacher, illustrate the bewildering and occasionally exotic field of choice available to would-be purchasers from two of the stalls.

Consider first D, who owes fiduciary obligations to P, and who accepts a bribe from X with which he buys land. The property appreciates in value. Acceptance of the bribe is a flagrant breach of D’s fiduciary obligations. D is personally accountable to P for the amount of the bribe.1 Is P entitled to a constructive trust over the land D has purchased with the bribe money?

The reported judgments and academic commentary offer a variety of answers to this question. On one side are those who say that P is entitled to an immediate constructive trust over the land.2 On the other are those who insist that P’s only liability is to account for the amount of the bribe.3 Some writers advocate an intermediate position. We might decide to impose the constructive trust on property acquired by some fiduciaries, such as bribe taking public officers, but award only personal relief against others, such as commercial agents.4 Alternatively, we might award P an account of profits, assessed at the appreciated value of the land, but deny proprietary relief.5 Finally, we might reject the application of the automatic constructive trust, crystallising at the moment of the fiduciary’s receipt of the bribe, but instead allow P to elect for the imposition of a constructive trust taking effect from the exercise of the election.6

If we are prepared to accept that a constructive trust can be imposed over D’s land, at least in some circumstances, let us consider a supplementary question. Will the availability of the constructive trust be affected by the fact that D is bankrupt at the time proprietary relief is under consideration? In Grimaldi v Chameleon Mining NL (No2) the Full Federal Court was of the opinion that in the case of actual bankruptcy the imposition of an equitable lien over D’s land may be sufficient to achieve “practical justice” in the circumstances of the case.7 Relegating P from constructive trust relief to the status of a secured creditor in D’s bankruptcy was justified by reference to the recognition of the remedial constructive trust in Australian equity. Whether D’s insolvency ought to preclude the award of a constructive trust, assuming that all other preconditions are satisfied, raises some important questions of legal policy and method which I this paper examines.

Now consider the second stall in the constructive trust bazaar. Suppose that P pays $1 million to D by mistake. D buys a beach property with the money. Is P entitled to the benefit of a constructive trust over the property?

Intending purchasers at this stall are spoilt for choice and there is a real risk of making an unwise purchase. One possible response is to hold that a D is a constructive trustee at the moment of receipt, the trust now attaching to the property purchased with the payment.8 Another is to apply dicta of Lord Browne-Wilkinson9, adopted and refined in an important New South Wales decision,10 and hold that the constructive trust attaches to the payment or its product when the recipient becomes aware of circumstances indicating to a reasonable person that the payment was mistaken. Another compromise solution —plaintiff rather than defendant centred —is to impose the trust from the time when P elects to set aside the transfer.11 And then there are solutions which are grounded in notions of commercial risk-taking. One of them would limit the award of the constructive trust to cases where, by analogy to the position of a secured creditor, the claimant has not taken the risk of the defendant’s insolvency.12 Application of this principle would result in the award of a constructive trust in most cases of mistaken payments. Exceptionally, proprietary relief will be denied, for example where the payer deliberately chooses to make an unsecured payment under a contract vitiated by mistake.13

Finally, there are those who would confine the mistaken payer to a personal claim in unjust enrichment.14 Moreover, some judges and commentators reject the thesis that a constructive trust awarded to P in this scenario is a response to unjust enrichment.15

So there are a number of potential responses to the mistaken payment conundrum. Each has been justified either in terms of authority, policy, or the logic of equitable title- sometimes all three. Each has its particular merits and defects; none has been authoritatively accepted as the ‘right answer’. But here also I pose a supplementary question. Assuming that in at least some situations equity imposes a constructive trust over a mistaken payment or its traceable product, will the imposition be affected by D’s bankruptcy at the time of application? Bankruptcy supplies the backdrop to most cases in this category16, but there is no suggestion in any of them that, for example, an equitable lien ought to be awarded as an alternative to the constructive trust.

The trust imposed over a mistaken payment, or its proceeds, is said to be an example of an institutional constructive trust.17 Why, in a system of equity that recognises both institutional and remedial constructive trusts, the mistaken payment should be regarded as institutional and non-discretionary, whereas the trust imposed over the proceeds of a breach of fiduciary duty is remedial and discretionary, has not been explained. Third parties, including creditors, have as much interest in the award of one type of proprietary constructive trust as the other.

Some writers have objected to the notion that the availability of a remedy can be determined by reference to the solvency of the defendant or to the impact of the remedy on third parties to the litigation.18 To permit the selection of remedy to be influenced by the presence or absence of third parties interested in the selection- in other words consequentialism — focuses on ends at the expense of means. When an interest under a trust is claimed, so the argument runs, then either the plaintiff is entitled to that interest, applying the established rules for recognising a trust, or he does not. It is impermissible to find that the defendant has a property right for the purposes of deciding an ‘inter partes’ dispute but only a personal right where third party interests are at stake. In the words of a critic of consequentialist reasoning, “the virtue of [legal] concepts lies in their relative invariance to context and thus in their applicability to a broad range of situations.”19

The aim of this paper is to examine whether courts apply consequentialist reasoning when deciding whether to impose a constructive trust20 and, if they do, whether we ought to mind about it. The dictum of the Full Federal Court in Grimaldi assumes that an analysis of the consequences of the award of equitable relief is desirable, perhaps even unavoidable. The critics argue that consequentialism subordinates the consistent application of equitable concepts to the view taken of the contexts in which they arise. The disagreement is fundamental to how courts exercise discretion when ordering proprietary relief. To anticipate my conclusion, some claims to constructive trusteeship cannot be satisfactorily determined without account being taken of the interests of third parties. This is true of constructive trusts imposed in order to enforce expectations, such as estoppel and Muschinski constructive trusts. These are genuinely remedial. But other claims should not be decided by reference to the existence of third party interests. Specifically, constructive trusts imposed in order to enforce a claimant’s title, or to restore title to the claimant, should not be subjected to remedial treatment. Constructive trusts imposed on fiduciaries to compel disgorgement of unauthorised gains occupy a contested middle ground between the other categories.

Two recent developments have given resonance to the debate about consequentialism. One is the Australian recognition of the remedial constructive trust; the other is the promulgation by the American Law Institute of The Third Restatement: Restitution and Unjust Enrichment.21 A brief word needs to be said about each of them before returning to my theme of consequentialist reasoning in constructive trust jurisprudence.

Professor Michael Bryan

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Footnotes

* Professor Emeritus, University of Melbourne. This paper owes much to conversations with Dr Elise Bant and to joint publications which arose out of an ARC project on proprietary remedies of which Elise was chief investigator. I am also grateful to the participants at conferences on proprietary remedies funded by the ARC grant and held at Melbourne University in 2010-2012 for their insights. The errors are exclusively mine.

1. Boston Deep Sea Fishing Co v Ansell (1888) 39 ChD 339 (CA); Mahesan v Malaysian Government Officers’ Co-operative Housing Society [1979] AC 374 (PC).
2. Att-Gen for Hong Kong v Reid [1994] AC 324 (PC); Thahir Kartika Ratna v PT Pertambangam Minyak dan Gas Bumi Negara (Pertamina) [1994] 3SLR (R) 312 (Singapore CA); Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 (Full Federal Court); Sir Peter Millet, ‘Bribes and Secret Commissions’,[1993] Restitution Law Review 7; DJ Hayton, ‘Proprietary Liability for Secret Profits’ (2011) 127 LQR 487.
3. Lister & Co v Stubbs [1890] Ch 1 (CA); Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 (CA); FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17 (CA); Sir Roy Goode passim but most recently, ‘Proprietary Liability for Secret Profits’ (2011) 127 LQR 493; Darryn Jensen,’ Reining In the Constructive Trust’ (2010) 32 Sydney Law Review 87, 93-94.
4. Sarah Worthington, ‘Fiduciary Duties & Proprietary Remedies: The Failure of Equitable Formulae’, [2013] Cambridge Law Journal (forthcoming).
5. Peter Birks, ’Property in the Profits of Wrongdoing’ (1994) University of West Australia Law Review 8.
6. Contracts between fiduciaries and principals which are voidable for breach of obligation can give rise to the imposition of a constructive trust taking effect from the date of election to avoid : Daly v Sydney Stock Exchange Ltd (1985) 160 CLR 371 (HCA). The availability of the election model outside the established categories of voidable contract is uncertain but see B Häcker, fn 11, below, for a structured model of election-based relief.
7. [2012] FCAFC 6 at [583]. The case did not involve the taking of a bribe and the dictum is obiter.
8. Chase Manhattan Bank v Israel British Bank [1980] Ch 105. See also Shields v Westpac Banking Corp [2008] NSWCA 268 (fundamental mistake justifies imposition of automatic constructive trust).
9. Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669,705. See also Ben McFarlane, ’Trusts and Knowledge’ in, Jamie Glister & Pauline Ridge eds, Fault Lines in Equity ( Hart Publishing, Oxford,2012) 169.Contrast Maqsood v Mahmood [2012] EWCA Civ 251, Ward LJ at [37], noting that Lord Browne-Wilkinson’s dictum was tentative and not part of the ratio of Westdeutsche.
10. Wambo Coal Co Pty Ltd v Ariff [2007] NSWSC 589. The recent decision of the Singapore Court of Appeal in Wee Chiaw Sek Anna v Ng Li — Ann Genevieve (sole executrix of the estate of Ng Hock Seng dec’d)[2013] SCCA 36, [169]-[184] recognises a remedial constructive trust only on the basis of the defendant’s knowledge of the facts entitling the plaintiff to the benefit of the trust.
11. B Häcker, ‘Proprietary Restitution after Impaired Consent Transfers: A Generalised Power Model’ (2009) 68 Cambridge Law Journal 324; Elise Bant & Michael Bryan, ‘Constructive Trusts and Equitable Proprietary Relief: Rethinking the Essentials’ 5(2011) Journal of Equity 171,181-185.
12. Andrew Burrows, The Law of Restitution (3rd ed, 2011, OUP) 176-180. Similar versions of risk theory have been canvassed in the North American literature: D Pacciocco, ‘The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors’ (1989) 68 Canadian Bar Review 315, 339; E Sherwin, ‘Constructive Trusts in Bankruptcy’ [1989] Illinois Law Review 297.
13. Andrew Burrows, The Law of Restitution, fn 12, 178.
14. William Swadling, ‘Policy Arguments for Proprietary Restitution’ in, S Degeling & J Edelman eds, Unjust Enrichment in Commercial Law ( Thomson Reuters, Sydney,2008) criticises the arguments adduced for proprietary relief in unjust enrichment cases but does not argue that relief should be confined to personal restitution.
15. Graham Virgo, The Principles of the Law of Restitution (2nd ed, 2006, OUP) 11-18,569-576. The property analysis, as opposed to the unjust enrichment analysis, of tracing the proceeds of a breach of fiduciary duty was approved in Foskett v McKeown [2001] 1 AC 102 (HL).
16. An exception is Shields v Wespac Banking Corp, fn 8, where the constructive trust was imposed as a precondition to a proprietary claim to property in the hands of third parties.
17. Wambo Coal Co Pty Ltd v Ariff [2007] NSWSC 589 at[40].
18. William Swadling, ‘Policy Arguments for Proprietary Restitution’, fn 14 above. Ben McFarlane, ‘Rights and Value: Means and Ends’ in, C Mitchell & W Swadling eds, The Restatement Third: Restitution and Unjust Enrichment (Hart Publishing, Oxford, 2013) ch1.
19. Ben McFarlane, ‘Rights and Value: Means and Ends’, fn 18, 30.
20. The inquiry is limited to a consideration of constructive trusts which, in at least some of their applications, confer proprietary protection on the beneficiary. Constructive trusteeship awarded as a formula for personal relief, for example for knowingly assisting the commission of a breach of fiduciary duty: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22;(2007) 230 CLR 89;Westpac Banking Corp v Bell Group Ltd ( in liq) [2012] WASCA 157, on appeal to HCA : [2013] HCA Trans 49. Cf Pauline Ridge ‘Constructive Trusts, Accessorial Liability & Judicial Discretion’ in, E Bant & M Bryan eds, The Principles of Proprietary Remedies (Thomson Reuters, Sydney, 2013), suggesting that ‘knowing assistance’ liability may in rare cases may attract proprietary relief.
21. American Law Institute, 2011. Reporter: Andrew Kull.