In a ‘trust’ situation, the trustee holds the property on trust for the benefit of the beneficiaries. A constructive trust is a type of trust that the law says exists because it would be otherwise unconscionable for the ‘trustee’ to deny someone else’s beneficial interest, for instance, in the case of mistake or fraud.
How does a constructive trust arise?
A constructive trust can arise in a number of different ways and provides a means by which the ‘owner’ will be required to hold property on trust (a proprietary interest) for the beneficiary/ies – even if there is a lack of any express or implied intention that they should do so.
A constructive trust may also arise where an intention to create a trust has been ineffective because it does not comply with the required statutory formalities. Constructive trusts are particularly significant in the context of the ownership of land, because they can provide a means by which someone can protect their beneficial share in the property, even where no formal declaration of trust has been made in their favour, or in the absence of other written agreement.
Constructive trusts have far reaching effects, for instance, the rights of the beneficiaries under a constructive trust have an automatic priority over the rights of other creditors, for instance, a lender, if the trustee/other co-owner is insolvent.
Preservation of pre-existing equitable interests
Constructive trusts also operate to preserve the interests of the beneficiaries of an existing trust, however created, if legal title (ownership) to the trust property is wrongly transferred by the trustee. A third party who buys the legal title to the trust property from the trustee will take the property free from the pre-existing trust interests of the beneficiaries, but only if he was a bona fide purchaser for value without notice, ie. market value was paid, and there was no knowledge of the pre-existing beneficial interests.
Constructive trusts arise where property has been misappropriated from its true legal owner.So if money or property is stolen, or a person is holding money as a result of fraudulent conduct, that person holds the property or money on a constructive trust for the benefit of the actual legal owner.
If a contract was induced by fraudulent misrepresentation, then the contract can be rescinded – and the party at fault holds the money paid on constructive trust for the other party.
Where money is paid by mistake, a constructive arises in favour of the payer.
Receipt of an unauthorised profit by a fiduciary
A constructive trust will also arise whenever a fiduciary receives an unauthorised profit in breach of their duty of loyalty owed to the principal. A fiduciary is under a duty not to abuse his position by receiving any unauthorised remuneration, or to profit by allowing his duty and his interest to conflict. Equity (the rule of fairness) will compel a fiduciary to hold any unauthorised profits he receives on trust for his principal, who will be entitled to claim an equitable proprietary interest in them, or their traceable proceeds.
What rights does a beneficiary have under a constructive trust?
A constructive trust is an equitable remedy in and of itself. So, depending on the circumstances,
the beneficiary of a constructive trust will be entitled to repayment of money held by the trustee; transfer of a beneficial interest in property; return of property; and other outcomes as appropriate.