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. By means of such a constructive trust, the entitlement of the true owner is preserved in equity. 

Receipt of an unauthorised profit by a fiduciary

A constructive trust will also arise whenever a fiduciary receives an unauthorised profit in breach of the duty of loyalty that is owed to his principal. A person who holds such a fiduciary position 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 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. 

Personal liability to account as a constructive trustee

Historically English law also utilised the concept of the constructive trust to impose a personal liability to account upon a fiduciary who had received an unauthorised profit, a stranger to a trust who had knowingly received and dissipated trust property, and a stranger who had knowingly assisted in the commission of a breach of trust. However in Paragon Finannce v D B Thakerar & Co [1999] 1 All ER 400 Millett LJ considered that the terminology of constructive trusts was inappropriate to describe such liability. He distinguished between two categories of constructive trusts. The first category were those situations in which a person had assumed the duties of a trustee even though he had not been expressly appointed as such. The second were circumstances in which the defendant was implicated in a fraud.

In both situations the liability arises because the fiduciary or stranger has failed to preserve the property which he held on trust.