The significance of constructive trust

Creation of proprietary interests

As a species of trust, constructive trusts inherently create equitable proprietary interests in favour of identifiable beneficiaries. A trust cannot arise in abstract, but only in respect of defined property. Constructive trusts therefore provide a means by which a legal owner will be required to hold property on trust for beneficiaries, despite the lack of any express or implied intention that he should do so, or where an intention to create a trust is ineffective because it is not expressed in compliance with the appropriate statutory formalities. This ability of constructive trusts to generate proprietary interests has been especially significant in the context of the ownership of land. Alongside resulting trusts, constructive trusts provide a means by which a person can obtain a share of the beneficial ownership where no formal declaration of trust has been made in their favour. Where constructive trusts do give rise to proprietary interests, they may have far reaching effects, especially by detracting from the interests that third parties may have acquired after the trust had arisen, for example if land subject to a constructive trust has been mortgaged, and by gaining automatic priority over the rights of other creditors if the trustee is insolvent. The institutional nature of the constructive trust gives the court no flexibility to consider the potential effects of the constructive trust on such third parties or creditors.

Preservation of pre-existing equitable interests  

Constructive trusts also operate to preserve the interest of the beneficiaries of an existing trust, however created, if the legal title to the trust property is wrongly transferred by the trustee. A third party who purchases the legal title to the trust property from a trustee will take free from the pre-existing trust interests of the beneficiaries if he was a bona fide purchaser for value without notice.

Misappropriated property

Constructive trusts have increasingly come to prominence in commercial contexts where property has been misappropriated from its true owner. If the misappropriated property was not previously subject to a trust, it may be rendered subject to a constructive trust in the hands of the recipient if it was misappropriated by a person standing in a fiduciary relationship to the owner, or if it was received in circumstances generating a fiduciary relationship between the recipient and the owner.

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For more information on:

  • Receipt of an unauthorised profit by a fiduciary
  • Personal liability to account as a constructive trustee